Kennedy's tuition loan plan helps

Recent legislation proposed by U.S. Sen. Edward Kennedy (D-Mass.) would encourage schools to switch from private loans subsidized by the federal government to federal direct loans.

The so-called STAR Act, an amendment to the Higher Education Act, would raise more than $17 billion in additional college scholarship aid without charging taxpayers, according to a statement from Kennedy's office.

The legislation encourages colleges and universities that use private loan programs to switch to a less expensive federal program. Schools that switch to the Direct Loan program would then be rewarded with funds that would have otherwise been used to subsidize the private lender programs.

"Colleges will receive incentives from the government for greater utilization of the Direct Loan program," said Kennedy aide Melissa Wagoner. "We hope students will be the winner and more money will be available for colleges."

Loans from the Direct Loan program come from the federal government, while loans borrowed through the Federal Family Education Loans originate from private lenders, such as banks and credit unions, who receive large government subsidies.

Because the private loan program requires these large subsidies, the Institute for College Access and Success, an independent student loan provider, called the current system a "complicated, costly waste of taxpayer dollars." The institute claimed that this year, Direct Loans could save taxpayers $9 billion and would actually earn taxpayers money.

James Kvall, a research scholar with TICAS, called Kennedy's STAR Act a better approach to student loan programs. He said that the STAR Act would allow direct lending schools like Boston University to keep the exact same loans they currently get, but would also allow them to share in the $17 billion in scholarship created by savings from schools switching to the Direct Loan program.

"The STAR Act lets colleges reform student aid themselves," he said. "It lets colleges end excessive bank subsidies and transfer the savings to student scholarships."

According to BU spokesman Colin Riley, BU is a Direct Loan school.

"Boston University fully supports the Direct Loan program because it is easy to manage and is good for students," he said.

The legislation is intended to make the greatest impact on those colleges and universities that utilize loan programs administered through private lenders. But some schools have said they were content offering private lender loans to their students.

One such school is Michigan State University, which recently dropped the Direct Loan program in 2003 and opted for the FFEL private lender program. According to a statement on MSU's website, the school switched to the subsidized program to take advantage of the "wider array of services and benefits available to borrowers under [FFEL]".

Rich Shipman, Director of Financial Aid at MSU, said the FFEL program gives better benefits to student and parent borrowers and that there is less work involved in administering the program. Shipman stressed that MSU does not receive any incentives from private lenders.

"It is much easier for our students and parents to find people who care about them at these local lenders than it was to find somebody who cared under Direct Lending," Shipman said. "When we first returned to FFEL our lender partners volunteered to help us out as we instructed students and parents on what they needed to do in the process. This simply wasn't possible under Direct Lending."

Jerry Joseph, director of financial assistance at the University of Illinois-Springfield, said his school has been a long time FFEL loan provider because of the better repayment incentives offered to student borrowers of the loans.

"The Direct Loan program is a one-size-fits-all offering," Joseph said. "The repayment terms don't compare with the better incentives under the FFEL program. Students will get short-changed if we switch to the direct program."