The University’s switch to the federal direct-lending program, effective fall 2010, will have minimal effects on students in the short term but could have many long-term implications related to loan access, stability and provider competition.

Emory announced the decision to switch last week, following the U.S. Department of Education’s urging in an announcement last October.

Higher education institutions currently opt to participate in either direct lending or in the Federal Family Education Loan (FFEL) program. But proposed legislation would mandate that universities switch to the direct-lending program, in which the government would source all student loans instead of third-party lenders.

Director of Financial Aid Dean Bentley wrote in an e-mail to the Wheel that the main draw of FFEL was lender choice. Because students can shop among different third-party lenders, loan providers would compete by offering different borrower benefits under FFEL.

“Competition between FFEL lenders resulted in a number of creative borrower benefit programs when financial flexibility existed,” Bentley wrote. For example, he wrote, some lenders allowed for automatic interest rate reductions at repayment.

But as the financial crisis hit, lenders could no longer afford to provide these benefits, with many lenders exiting the FFEL market or taking advantage of the Department of Education’s loan purchase program.

Senior Vice Provost Santa Ono wrote in an e-mail to the Wheel that because the loan purchase plan and other federal intervention were essentially propping up much of the FFEL system, a switch to direct lending would be a logical step.

“During the economic downturn, many banks and lenders either shut down such programs or could not raise the necessary capital to lend to students,” Ono wrote. As a result, students experienced a declining access to loans.

Bentley wrote that the switch to direct lending reflected a trade-off: eliminating the advantages of third-party lender competition that exist during healthy economic times but providing a stable source of student loan capital with a “simplified front-end” process. He added that long-term benefits would also include loan forgiveness for qualifying public service jobs and more flexible loan repayment options.

In the short term, Bentley wrote, students must complete a Master Promissory Note and an entrance interview under the new program, adding that students are not accustomed to “completing these requirements more than once” at Emory.

Bentley wrote that market volatility aside, he believes the larger issue is related to volatility caused by legislative proposals to dismantle FFEL entirely.

Emory cannot afford to wait until a final legislative decision is made because the transition away from the FFEL program requires many behind-the-scenes operational processes, Bentley wrote. Emory will not risk delayed or unavailable loan disbursements next fall, he wrote, so the transition must be made now.

“I believe the majority of our student and parent borrowers are savvy and would prefer to choose from a range of FFEL products that best meets their needs if product differentiation existed,” Bentley wrote. “However, significant product differentiation really doesn’t exist any longer, and stability became the primary driver as we discussed the best options for our students.”

Ono wrote that the direct-lending program can be adopted more easily at institutions with a central financial aid office. Though many of Emory’s financial aid activities are handled by the Office of Financial Aid, he wrote, Emory’s financial aid is not fully centralized.

Significant changes in operational systems would be necessary to facilitate a transition to the direct-lending program, Ono wrote. Though the government has suggested that federal funds would be available to supplement the transitional cost, he wrote, the administration has not made any concrete promises. He wrote that some also doubt whether the government has the capability to roll out such a large-scale lending program.

“In the absence of such funds, Emory will have to absorb such transitional expenses internally,” Ono wrote. “As challenging as it already is for us to run student enrollment functions with our existing budget, these new costs will put additional strain on those resources.”

Ono wrote that based on the experience of students at other institutions using the direct-lending program, he believes Emory students would be receptive to the switch. In recent years, the move to direct lending has been steady, he wrote, adding that surveys indicate that the direct loan process remains very user-friendly for students.

— Contact Tiffany Han.