Paying for college: Streamlined loan program will save billions

October 30, 12:53 PMCollege Admissions ExaminerLauren Starkey

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With applications in the works, the next step on the college admissions to-do list is figuring out how to pay for what will add up to tens, or even hundreds, of thousands of dollars in tuition, room and board, and other costs. The best, cheapest, and safest way to get money for higher education (unless you’ve got the savings to cover the bills) is through federal loans.

Your first step in the process is filling out the FAFSA, the form used to determine eligibility not only for loans, but for almost every type of aid, including school-based grants and scholarships. Expect to spend at least a few hours completing the six-page form (Secretary of Education Arne Duncan quipped that you need a PhD to fill it out, and the Department of Education is now studying ways to simplify the form). But once your eligibility is determined, how does financing work?

Right now, you can get the most common federal loan, the Stafford, through a private lender (the loan is subsidized and guaranteed by the government, which pays interest until you graduate) or through the Federal Direct Student Loan Program (FDSLP). As the name implies, schools that participate in the FDSLP apply the loan amount directly to your costs.

However, the days of private Stafford loans may be numbered. The House of Representatives voted last month to require that all colleges convert to the FDSLP by July 1. The measure will save billions of dollars in subsidies which are currently paid to private lenders. Although the Senate has not yet voted on the legislation, the government is urging schools that have not already done so (the majority of the nation’s colleges) to make the switch.

Not unexpectedly, private lenders, including Sallie Mae, are not happy about the development, and are trying to fight the switch. They argue that it won’t save taxpayer money, and that many college financial aid offices are neither equipped nor prepared for the switch. The Higher Ed Watch crunched the numbers, and—can it be true?—shows substantial savings, calling the lenders’ arguments “desperate.” In addition, schools that have moved over to the Direct Program report that the transition was relatively painless.

What these recent developments mean for college students and their families is a future higher education loan system (or a current one for about 500 colleges) that is streamlined and more cost-effective. Expect to see local sources of loan money, such as credit unions, although no simpler to apply for. It’s time, Mr. Duncan, to get to work on that FAFSA form.