Direct Lending Provision Tied to Health Care Reform
March 26, 2010
Contact: Kathy Love — 573.522.1463
Jefferson City — Major changes to federal student loan programs passed both houses of Congress this week as part of health care reform legislation.
The Health Care and Education Affordability Reconciliation Act of 2010 will change how most student loans are administered in Missouri by requiring all new federal student loans to come directly from the federal government. Under the new legislation, the Missouri Department of Higher Education will no longer serve as a guaranty agency for student loans.
Many details of the switch to direct lending are as yet unclear. Loan guarantors are currently required to work with borrowers to keep loans from defaulting, a service that has helped keep default rates in check, according to Assistant Commissioner of Higher Education Leanne Cardwell, who oversees Missouri's student loan program.
"We provide lots of hands-on counseling, default prevention and financial literacy services to borrowers around the state," Cardwell says. "It remains to be determined how those needs will be met" under the recent legislation.
The agency also conducts programs to encourage students to attend college, help them complete financial aid applications on time, and plan ways to pay for higher education.
MDHE has a good record of reducing student loan defaults. Since 2001, when the agency began providing federal grants to help institutions work with student borrowers, default rates declined significantly. Preliminary reports show that the default rate for Missouri borrowers who entered repayment in 2008 declined from 7.49 percent to 6.76 percent from the previous year, while the national average for 2008 is expected to reach 8 percent.
The hands-on counseling and other default prevention services provided by MDHE could be outsourced to large out-of-state contractors, Cardwell says. "At this point, we are hoping to maintain the level of service our borrowers expect. We are mission-focused and Missouri-focused, and that has helped us rein in default rates while making college accessible to more students."
Many of the state's large, four-year institutions have already converted to direct lending, and by June 30, loans originating from private lenders will cease under the new legislation. Some student borrowers could have split payment responsibilities to different lenders for as long as 20 years, or until the loans are repaid. MDHE will continue to service its existing loans during the transition.