College loan business to change dramatically

March 31, 2010 3:55:11 PM PDT
The college loan business has just under gone a huge change that will affect every student who needs to borrow money for school. The changes, which were included in the recently signed health care reform bill, basically cut out banks from the government-backed student loan business.

Many college students have loans.

"So far, I've got about 25, $25,000 of loans out right now," University of Houston-Downtown senior Zachary Perez said.

While they still have to pay off the loans, the college loan industry has just undergone a huge change.

In the past, private banks would write college loans that were backed by the federal government. Now, the government will be writing those loans directly.

"It makes the process a lot smoother for the student," said Dr, Diana Pino, vice chancellor of Student Services at Houston Community College. "It also makes the process a lot easier for the institution because it takes a lot more time to work with a third party than being able to provide direct lending."

She says the move should make it easier for students to get loans, as the new rules tie repayment to a graduate's income level.

"When they do repay their loans, it's going to be at 10 percent of what they are bringing in," Pino said.

Cutting banks out of the process is expected to save the government $68 billion over the next 11 years.

Officials at the University of Houston say students who had bank loans will have to fill out some additional paperwork to get government loans, but financial requirements are not changing.

"It does not change their eligibility requirements," said Jessica Thomas, assistant director of the university's Financial Aid department. "It is basically just one direct place to get the loans from."

Now that the government is no longer backing private loans, banking experts we spoke with say there will likely be fewer private loans for college.

Wes Hoskins, president of the Texas Bankers Association, told us that "banks will be reluctant to give loans without the government backing."

Bankers also say they don't think the government can do a better job than the private sector because there had been competition among banks who wrote student loans.

Colleges have to switch to the direct federal lending program by July 1.


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