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Sallie Mae & Direct Lending In The Headlines… again

salliemaeYesterday, I wrote a nice article about how Sallie Mae is doing great things to help educate families and students about the FAFSA and the Financial Aid process. For the most part it was a warm and fuzzy, all is roses, type of article.

In order to be fair to our reader base and keep you fully educated on the world of financial aid, I probably should devote a little attention to some of Sallie Mae’s other activities.

Right now, Congress has been working on legislation that will help to streamline the way federal loans are delivered to deserving students. Currently the loans are backed by the federal government but the private banking system takes care of funding and administering the loans to the schools who then apply to the tuition accounts of millions of students nationwide. I could go in greater detail on this whole process but you would probably stop reading after 2 sentences and reach for the Tylenol.

Anyway.. Congress is/was looking to take the banks out of the equation and go through a process called Direct Lending. Basically the federal government would provide the funding and administering of the loans directly to the schools and drop the banks out of the process.  Trust me.. there are pros and cons to each of these methods but my personal opinion is that Direct Lending is probably the way to go if we are to simplify and streamline the process in which students receive federal loans. However, my personal opinion holds very little weight and it is probably driven by the fact that I think Direct Lending is coming whether we want it to or not.

By leaving the banks out of the lending process, the Department of Education estimates that it will save approximately 80 Billion dollars (yes that is a “B” and not a “M”). The goal is to utilize this savings to help pump money into some other successful education programs like Pell and Perkins.

As you can imagine, Sallie Mae, being one of the largest education lenders and loan processors in the nation with 22 billion dollars in student loans under their belt, is not too keen about the new proposed legislation. They are so unhappy with the education bill that they have spent nearly 8 million dollars in 2009 to lobby against it. My guess is that they will spend even more in 2010.

Sallie Mae’s position on the legislation is not necessarily wrong, they just feel that the banks need to remain involved in the process because they play a vital role in educating students and families about the loan process. In addition, their top notch customer service is being marketed as being far superior to anything the government will be able to provide(and they may be right…). Also, the banks help to provide a competitive market for education loans and offer different borrower discounts to try and persuade a student from choosing one bank over the other. These discounts come in the form of reduced fees, interest rate and principle reductions, etc..

As I said, there are multiple sides to this story and each one carries their own conviction for why their position is best. Here is the latest article from the New York Times on the topic. If you are really interested, or having trouble falling to sleep, start researching Sallie Mae, Direct Lending, the Department of Education and all the related legislation and proposals. You will be sure to find out more than you ever wanted to know… In the meantime, if you just want to figure out how to make college affordable, keep checking back here at CheapScholar.org and we will do our best.

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