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OSU ahead of the curve in removing ‘middle man’ from loans

When Congress passed student loan reform, which was tucked into the health care package, President Barack Obama hailed its passage, while critics decried it as yet another government takeover.

But one of the key provisions of the Student Aid and Fiscal Responsibility Act of 2009 is not likely to have any effect on Ohio State students.

That’s because the main part of the program — removing private banks as the “middle men” of federal student loans — is something OSU has done since the early 1990s.

“Our students will see no change whatsoever in their relationship with our office and how we process their loans,” said Diane Stemper, director of Student Financial Aid.

Federal student loans come in two forms: Federal Direct loans and the Federal Family Education Loan Program. Stemper said both offer essentially the same loans. The only difference is in how they are administered.

In the family education program, private banks administer loans to students, but they are subsidized by the federal government for doing so. The government also protects the banks from default. At an event marking the passage of the bill that eliminates this program, Obama called the arrangement a “sweetheart deal” for the banks.

OSU only offers Direct loans, which are administered directly by the federal government.

“It has no impact … on Ohio State University because we have the system in place,” Stemper said, “and have been using it for a very long time.”

Removing the banks will save about $68 billion over 11 years, according to the Congressional Budget Office, the non-partisan accounting agency that Congress uses to “score” legislation.

The savings will be used to increase both the availability of Pell Grants, a form of financial aid for low-income students, and the amount that students will be eligible to receive.

For the current year, 2009-2010, there have been 13,000 recipients of federal Pell Grants at OSU, which is an increase of about 2,000 from last year, Stemper said.

The increase probably reflects “the economic hardship many families are facing,” she said.

The total amount held by these students is about $48.5 million.

Beginning in 2013, the maximum Pell Grant amount, now set at $5,550 a year per student, will begin increasing until it reaches $5,975 in 2017, according to the Associated Press.

Obama called the increased funding for Pell Grants “one of the most significant investments in higher education since the G.I. Bill.”

Tally Hart, the senior adviser for economic access at OSU, said the increased Pell Grant funding would let low-income students in fourth and fifth grade “know that if they get ready academically for college, money will be there to help them.”

Stemper said the funding increase would be “tremendously beneficial” to students even after they graduate.

“The more students that qualify for [a] Pell Grant, you hope that it allows them to borrow less and to graduate with a lower debt burden,” she said.

The reform will also potentially make paying off a student loan debt less onerous for students.

The law dictates that, starting with loans taken out after 2014, borrowers won’t have to spend more than 10 percent of their income paying off student loan debt. Currently, it is 15 percent.

Also, if payments are made on time, any remaining amount will be forgiven after 20 years rather than the current 25 years.

The average debt of OSU students graduating with a bachelor’s degree is $23,000, Stemper said.

About 75 percent of colleges and universities use the family education loan program, which will end in July, according to FinAid.org, a website that offers financial aid information. OSU is among the remaining 25 percent of schools whose loans are administered directly by the Department of Education through university financial aid offices.

OSU switched from the family education loan program to direct lending a few years after the direct loan program was instituted in the early 1990s, Stemper said.

Though she didn’t work for OSU at that time, she said many schools adopted the federal program because it made the process more “streamlined.”

“Many institutions felt that they could do a better job at getting funds to students more quickly,” she said.

Stemper said most of the Big Ten schools already used the Federal Direct Loan program, but that some other schools were likely “scrambling” to implement the changes that the law requires. The earliest provisions of the law take effect in July. 

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