CALPIRG study backs direct loans in campus aid

California college students could receive up to $246 million in new financial aid and UCSD could find up to an additional $4 million through proposed changes to the way the federal government administers its student loans, according to a new report released by California Public Interest Research Group’s Higher Education Project and the American Association of Collegiate Registrars.

Billy Wong
Money matters:

The report backs the Student Aid Reward Act, new federal legislation that proposes to discontinue the Federal Family Education Loan program, which pays private lenders to provide loans, and replace it with a Direct Loan Program, through which the government loans money directly to students.

“The only difference [between the programs] is that under the Direct Loan Program, the government lends directly to the students, while under FFEL, the government subsidizes loan companies to lend to students,” Interim Revelle College Freshman Senator Ted McCombs, who co-released the study with the campus’ CALPIRG chapter, stated in an e-mail. “The result is, with all its bureaucracy and subsidies and guarantees, FFEL costs the government about 12 times, on average, [more than] direct loans.”

Under the S.T.A.R. Act, the federal government would use the savings to provide a $3 billion increase in aid to students who are already eligible for Pell Grants or to needy graduate students, according CALPIRG Higher Education Advocate Merriah Fairchild.

Currently, universities are allowed to choose which program they use to provide loans to students. UCSD, for example, continues to use FFEL, though the act would provide financial incentive to universities that switch to direct loans.

CALPIRG campus organizer Kirsten Schatz said that UCSD stands to earn up to $4 million more in aid if it adopts the Direct Loan Program, and San Diego State University could also receive an additional $5 million.

“This $3 billion increase would be enough to give each Pell Grant recipient almost $600 more in additional grant aid a year, which is six times the proposed increase in the Pell Grant maximum for next year in the federal budget,” the report stated.

However, UCSD Financial Aid Director Vince De Anda said that the findings in the report might be inaccurate.

“It is pretty much wishful thinking,” De Anda said. “The analysis they used for estimating the savings is faulty. We don’t know whether it will produce $4 million [for UCSD] and if that money will go to financial aid.”

De Anda said that he recommended FFEL over the Direct Loan Program.

“I think students get better service through the FFEL program because there is a lot of price competition between many lenders,” De Anda said. “Now [FFEL loans] are getting better rates than direct loans. Students have a lot of choices between lenders [through FFEL Loans] — you only get one choice with direct loans.”

In addition, a separate report sponsored by lending companies earlier this year challenged the federal government data used in the CALPIRG study.

Peter Warren, a spokesman for the student-lender association Education Finance Council, which co-sponsored the report, said that the CALPIRG study was inaccurate because it undershot the cost of the Direct Loan Program.

“I think the PIRG report underestimates the cost of direct lending, and it therefore contains a crucial bias,” Warren stated in an e-mail. “Several of the factors that the direct loan scoring does not include are administrative costs, reasonable interest-rate scenarios and the tax loss to the [federal] treasury that would result if the guaranteed student-loan portfolio was transferred to direct lending.”

The lender’s report stated that the comparison between the Direct Loan and FFEL programs was inconclusive because it does not accurately project the relationship between long-term and short-term interest rates.

However, the CALPIRG report states that the Direct Loan Program is more beneficial to students based on the subsidy rates provided by President George W. Bush’s budget proposal for next year.

Schatz said CALPIRG released the report to encourage legislators from San Diego County to support the new legislation backing direct loans.

“It is something that CALPIRG has been working on — endorsing the S.T.A.R. Act,” Schatz said. “We have been calling on legislators for support, but we have a couple in the area who haven’t endorsed it, and we hope they will decide in [its] favor.”