Northeastern to alter loan program
Funding to come from government
Northeastern University plans to announce today that it will provide student loans exclusively from the government in an effort to ease students' and parents' anxiety over the availability of loans amid recent tumult in the financial markets.
The move is a major shift for the university and one that could herald a broader change in the source of education loans.
Northeastern officials said the move was prompted by the turmoil in the student loan industry caused by fallout from the subprime lending crisis. A number of commercial lenders and state agencies have announced in recent weeks that they will no longer provide federal education loans because of a deepening credit shortage and reduced government subsidies.
The announcements have stirred widespread concern among college students and parents about landing loans for the fall, but most financial aid specialists say students will not have difficulty securing government-backed loans for the next academic year.
Northeastern officials said they believe moving to the direct-loan program, in which students borrow solely from the US Department of Education, will provide a more stable source of funding and simplify the often-confusing borrowing process.
"It is our responsibility to ensure that every student and parent has a sure and clear path to obtain educational loans, particularly at this important time of year where students are making decisions on college options," said Philomena Mantella, Northeastern's senior vice president for enrollment and student life, in a phone interview yester day.
Northeastern students borrowed $126 million last year through federal education loan programs such as Stafford, Perkins, and PLUS. Mantella said she did not anticipate resistance from students who might prefer to choose their own lender.
Since last year's student loan scandal over conflict-of-interest abuses, regulations were introduced that restrict colleges from steering students toward preferred commercial lenders, she added, giving another impetus for the change.
The direct-loan program offers several repayment methods and allows borrowers to switch repayment methods if needed, university officials said. Northeastern, rather than a bank or other lender, will directly disburse the loans.
Seamus Harreys, dean of student financial services at Northeastern University, said borrowing money from the government will provide "safe harbor" from the current turbulence in the financial markets and is "consistently the lowest-cost option."
The direct-loan program provides about one-third of all student loans, he said.
Northeastern follows Pennsylvania State University as the second major university in the country to end its relationship with third-party lenders such as Sallie Mae for federally guaranteed student loans, and instead steer its students toward loans provided directly from the government.
Northeastern's new policy takes effect in July.
The announcement coincides with a Senate field hearing held at the university today. The hearing, hosted by US Senator Edward M. Kennedy, will focus on college costs and access to student loans. Kennedy, chairman of the Committee on Health, Education, Labor, and Pensions, is calling for increased federal loan limits and expanded eligibility to reduce families' reliance on private loans.
"The ability of students and families to pay for college should not be determined by the quarterly earnings of banks and lenders," he said in a statement.
Northeastern's move "will help protect students, as the Direct Loan Program is insulated from disruptions in the private credit markets," he said.
On Friday, House lawmakers urged US Secretary of Education Margaret Spellings to ensure that the direct-loan program is equipped to handle increased demand for federal loans.
Students have increasingly turned to higher-interest private loans in the past decade to handle rising tuition costs. Private loans accounted for 24 percent of all education loans last year, up from 6 percent a decade ago, according to the College Board's latest survey.
But with the credit crunch making it harder to secure capital, some lenders are tightening eligibility or forgoing student loans altogether. About 20 percent of Northeastern students take out private loans, which will not be affected by the new policy.
Students and parents have grown concerned as numerous providers of student loans have backed out of the industry in recent weeks.
Earlier this month, New Hampshire's nonprofit student-loan agency said it will no longer offer private loans, and the Massachusetts Educational Financing Authority, which lent money to 42,000 college students last year, has struggled to secure financing for its loans. The Pennsylvania Higher Education Assistance Agency has also announced it was leaving the federal student loan program.
But the vast majority of commercial lenders remain, and some specialists said colleges are overreacting to the current uncertainty.
The National Association of Student Financial Aid Administrators recently announced it "is not aware of any student being denied a federal loan due to market conditions."
Last week, the Consumer Bankers Association sent a letter to financial aid administrators assuring that banks will continue to make private and government-backed loans.
