Amid the current controversies flying about possible federal student

financial aid cuts, the federal direct lending program from the Department

of Education continues to seep into the financial aid scene gathering

praise and consternation from unversities all over the country.

Last year, UT created a committee made up of officials from each UT

campus’s financial aid and bursar’s offices to monitor the new Federal

Direct Student Loan Program at other universities and to decide whether

this system would be beneficial to UT.

Direct lending, officially begun on July, 1, 1994, affects all students

with Stafford loans, which currently utilize private lending agencies such

as banks. Under the new federal direct loan program, aid comes directly

from the Department of Education administered by individual universities

and colleges.

Currently there are 104 institutions of higher education using the new

nine-month-old program, but by July 1 approximately 1,500 schools will be

enrolled, which makes up 40 percent of all student loans, according to the

Department of Education.

“More than two million students are expected to receive direct loans next

year,” a release from the Department of Education said.

Only two Tennessee schools, University of Memphis and West Tennessee

Business College, are enrolled. Some other schools are Harvard University,

University of Florida and Mr. Bernard’s School of Hair Fashion in Lewiston,

Maine.

Of the schools enrolled now, 36 are public four-year schools, 35 are trade

schools, 22 are private four-year schools, nine are community colleges, one

is a medical school and one is a law school.

Fifty-nine of the schools gave the direct lending program a rating of five

on a scale of one to five and 92 percent gave a rating of four or above,

according to a survey by the Department of Education.

Faye Chance, chairman of the committee and UT associate bursar, said so far

the committee has not found enough evidence in support of the new program

to replace the current one. She said the program is too new to make a

decision.

She said the current financial aid system is always evolving and has good

support from the State Assistance Program, the lending agency for the

Stafford loans for UT students.

“As long as costs and levels of service are comparable and equal it will be

hard to tell which is best,” she said. “We want to be assured that the

student is the beneficiary here.”

Margaret Miller, associate director of the financial aid office, said the

students’ eligibility to get the loan and the amount of the loan would not

differ from the current system.

“The result should be the same for the student,” Miller said.

One of the factors added into the probe is the effect the loans will have

on students after they leave the university, she said.

“When students leave they are still involved in the loan,” she said. “A

(loan) commitment is a long time commitment.”

Another factor the committee is considering is what kind of university

resources the program requires. Chance said financial staffs could increase

or decrease depending on which level of involvement with the program the

university chooses. In some cases the government servicer would do all the

work for the university.

Then there is the problem for students who have the Stafford Loan and are

switched in mid-education to the direct lending program.

Wayne Breazeale, committee member and financial aid associate director,

said making the switch would be unfair to these students.

“They would have to buy a promissory note from the lender, and then what

happens if the lender doesn’t want to sell?” he said.

Brazeale said another area of concern about the program is its future. With

the change in Congress, there has been talk of capping the percentage of

loans given out or even abolishing the program. Talk of abolishing the

Department of Education concerns decisionmakers as well.

The Stafford Loan program is assured in legislation, so there is no worry

that it would disappear, he said.

“I hope the committee would say to wait a year until the political dust

settles to see what is happening,” he said. “We can join (the program)

anytime we want so there is no hurry.”

Last week the committee heard testimony from Leo Kornfeld, senior adviser

to Education Secretary Richard Riley, and Ron Gamble from the Tennessee

Student Assistance Corporation, which is the guaranty agency for UT

Stafford Loans.

According to the Department of Education, the program has made the lending

process simpler as far as paperwork, staff overtime, phone calls to

lenders, turn around time for loan processing and improved cash flow and

flexibility in structuring individual loans.

Some universities claim direct lending enables financial aid offices to be

more in control of their own programs and funds, which they say is an

“impossibility with the guaranteed student loan program, which involves

over 7,000 lenders, 42 guaranty agencies and more than 50 secondary

markets.”

There have also been claims from President Clinton that the program costs

less for taxpayers, but others argue direct lending applies the same fees

and interest rates for loans as the current program.

Stephanie Babyek, a spokeswoman for the Department of Education, said

positive reviews from students include more loan security and repayment

flexibility.

This last year more schools applied than those who could be enrolled, she

said. More will be enrolled after this year as the percentage of rises from

40 to 50 to 60 in the next three years.

On the other side, Brazeale said the guaranty agencies have served students

well in the past.

“There are good points to the status quo,” he said.

Similar reaction comes from U.S. Senator Bill Frist in his remarks after

last week’s Education, Arts and Humanites subcommittee oversight hearing on

direct lending.

He said not phasing in slowly enough is unwise “particularly since we do

not even yet know the results of the demonstration program.” He said he was

not convinced the program saves money for taxpayers.

Frist said in an interview he does not support moving a program that “can

be carried out in the private sector” to the government.

Chance said if UT decides not to enroll in direct lending, the new program

has helped improve the current system.

The amount of time to get money has decreased since direct lending came on

the scene.

“It has generated competition for banks. This is good,” she said.

Recently, UT converted to an electronic process with UT’s two biggest

lenders, another way the current system has improved, she said.