Private lenders are losing the battle over student loans. By this time next summer, they probably will be cut out of the lucrative student lending market, with a handful of them relegated to the role of simply servicing loans made by Uncle Sam.
"This is the biggest change in federal loans for higher education since 1965, when the original program was created," says Terry Hartle, senior vice president at the American Council on Education.
Sallie Mae, NelNet, American Education Services/PHEAA and Great Lakes Education Loan Services have been awarded loan servicing contracts by the Department of Education. But even with such a contract, the bill means "we would be about half of our size," says Martha Holler, a spokeswoman for Sallie Mae.
Look for Congress to pass the direct lending plan sometime this fall. The Congressional Budget Office estimates it would save about $87 billion over the next 10 years.
"Among other things, the savings will be used to significantly boost Pell Grant scholarships (need-based grants given to low-income students), to keep interest rates low on need-based federal student loans for years to come, to simplify the FAFSA (Free Application for Federal Student Aid) form, to invest in strengthening community colleges," Rachel Racusen, the deputy communications director of the House Education and Labor Committee, said in an e-mail.
Lenders argue students will suffer
Meanwhile, many lenders argue that with only direct lending, students would get less in the way of services. "We offer the ability to maintain the diversity needed to keep competition up and pressure on other lenders," says Christopher Chapman, CEO of Access Group, nonprofit student lender in Wilmington, Del. "We also provide the value-added services," such as financial education.
Banks have their own turf to protect. The legislation means not only lost profits for banks now, but also a tougher time courting young borrowers in the future. In the past, college loans provided lenders easy entrée to establish a relationship with a future customer.
An overhaul for schools
"To implement the proposal, about 4,500 schools would have to convert lending systems," Sallie Mae's Holler says. "It's not like putting a different disk in their PC; the whole system has to be reworked."