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Student Loan Default Rate Rose in 2008

Mar 27, 2009

by Scholarships.com Staff

Student loan default rates increased in 2008, according to a preliminary report released by the Department of Education.  The numbers, which still aren't finalized, indicate an increase from 5.2 percent last year to 6.9 percent this year in the two-year default rate on federal student loans. The increase in default rates is likely due to continued economic difficulties facing new graduates.

The report also shows a difference in default rates between the Federal Family Educational Loan Program and the Federal Direct Loans Program, though FFELP advocates are arguing that the differences are largely due to different makeups of the schools participating in each program (For example, students at for-profit schools are more likely to default, and are also more likely to participate in FFELP).  However, even among similar groups, FFELP still had a slightly higher default rate.

Typically, reports on default rates are released around September and don't compare FFELP and Direct Loans, but Congress had requested data earlier to aid with the federal budget decision-making process.  This is only the latest bit of bad news for FFELP, which President Obama urged Congress to eliminate in the 2010 federal budget.  The Congressional Budget Office has said that eliminating FFELP could save more money--$94 billion, double the previous estimate.  Additionally, a report by two interest groups states that the proposed increases in Pell Grants, some of whose funding is tied to cutting FFELP, would increase the average grant award by $121 and would make 260,000 more students eligible for the program.

If you're a college student looking to minimize student loan debt and reduce your risk of default, it's still not too late to start your scholarship search and find free money you won't need to pay back.

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Direct Lending Continues to Gain Popularity

Mar 10, 2009

by Scholarships.com Staff

According to US Department of Education data, over the last year colleges and universities have continued to leave the Federal Family Education Loan Program in droves, switching to the federally run Direct Loans Program.  Between February 2008 and February 2009, the number of schools issuing federal Direct Loans increased from 1,072 to 1,620, an increase of nearly 34 percent.

Direct Loans and FFEL are two competing programs schools choose between for the two most common varieties of federally funded student loans.  Both Stafford Loans and PLUS Loans can be issued and consolidated through either program (Perkins Loans are issued through separate loan programs).  Previously, FFEL was more popular, due in part to generous government subsidies that allowed participating banks to offer breaks on origination fees and loan repayment, as well as comprehensive programs to prevent borrowers from defaulting.

However, subsidy cuts and the collapse of credit markets in 2008 both took their toll on FFEL, as well as private loans, which are often issued by the same banks that participate in FFEL.  Many lenders left the program, and those still participating in FFEL could no longer afford to offer incentives to borrowers, and when the government stepped in to keep the system afloat last year, part of the deal involved taking other incentives and inducements (primarily ones involved in the conflict of interest scandals of 2007) off the table.  This ongoing string of troubles prompted more college financial aid offices to decide to make the switch to Direct Loans for Stafford and PLUS.

Direct lending has also received an endorsement from the executive branch of the federal government.  President Obama has called for an end to the lender subsidies that comprise the FFEL program, and urged Congress to consolidate funding into one federal student loan program: Direct Loans.

And remember, there’s no need to rely on expensive student loan options to pay for your college education. For more information on finding free scholarship money for college, conduct a Scholarships.com free college scholarship search today, then apply and win! It’s that easy!

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Student Loan Rescue Plan to Move into Next Phase in February

Jan 30, 2009

by Scholarships.com Staff

The student loan rescue plan that will allow the Department of Education to buy up student loans issued since 2003 will begin operating in February.  The plan will set up a bank to act as a "conduit" for purchasing older student loan assets and will also allow the Treasury to become the buyer of last resort for assets the conduit bank is unable to refinance.  The Treasury will buy up student loans through this program for the first 90 days, after which the Department of Education will take over.  The Bank of New York Mellon is currently the only authorized conduit, though more could be added later.

This plan will hopefully allow banks that have had to leave the FFEL program to find the capital to reenter it through selling some of their older student loans to the conduit bank.  While students borrowing Stafford Loans through the FFELP had few problems finding loans in 2008, this program should help the student loan marketplace continue to stabilize and should help prevent potential problems down the road.

Another $200 billion program announced by the Treasury in November is also set to begin operations in February.  This one targets consumer credit in general, but also includes private student loans.  Between these two programs and the proposals contained in the economic stimulus package currently working its way through Congress, students entering college in 2009 may have an easier time finding financial aid.

And remember, there’s no need to rely on expensive student loan options to pay for your college education. For more information on finding free scholarship money for college, conduct a Scholarships.com free college scholarship search today, then apply and win! It’s that easy!

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Fifth Third Bank Involved in Student Loan Scandal

Jan 8, 2009

by Scholarships.com Staff

Fifth Third Bank could potentially lose its right to participate in the Federal Family Education Loan Program, the Department of Education's program that allows private banks to offer Stafford Loans and PLUS loans.  An audit by the Department of Education's Office of the Inspector General suggests that Fifth Third may have offered illegal inducements to third-party lenders.  Lenders that participate in FFELP, such as Fifth Third, are legally allowed to act as trustees for third-party non-FFELP lenders, allowing the non-FFELP lenders to make or purchase federal student loans.  Fifth Third's actions in some of these "eligible lender trustee" agreements have come under scrutiny, resulting in the audit and harsh recommendations from the Office of the Inspector General.

Fifth Third and the now-defunct Student Loan XPress entered into eligible lender trustee agreements with three lenders: MSA Solution Inc., Pacific Loan Processing Inc., and Law School Financial.  The two FFELP lenders then paid these three trustees premiums to generate higher volumes of student loans.  According to the audit, this violates federal law and could cost Fifth Third its status as an FFELP lender.  The Office of the Inspector General also recommended that the Department of Education further penalize Fifth Third through fines and the withholding of federal guarantees on the over $3 billion in loans generated through these agreements.

This is not the first time an FFELP lender has come under fire for lending practices.  Over the past two years, numerous lenders have been investigated by the Department of Education or New York Attorney General Andrew Cuomo for questionable actions ranging from bribing schools for places on preferred lender lists to recycling loans through a loophole to claim millions of dollars in federal subsidies.

And remember, there’s no need to rely on expensive student loan options to pay for your college education. For more information on finding free scholarship money for college, conduct a Scholarships.com free college scholarship search today, then apply and win! It’s that easy!

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