Starting next September, UConn will change the way it processes Federal Stafford, Plus and Grad Plus loans.
UConn currently uses the Federal Family Education Loan (FFEL) program, which is backed by various private banks. The financial aid office recommends six lenders for federal loans: Accessgroup, Citibank, Chase, Citizen's Bank, Connecticut Student Loan Foundation and Sallie Mae Education Trust.
According to Jean Main, the director of the Office of Financial Aid Services, UConn students borrowed approximately $73 million in Stafford Loans, $26 million in Plus loans and $3.7 million in Grad Plus loans in the fiscal year that ended in July 2008.
The new program, called the William D. Ford Federal Direct Loan program, is backed by the United States Department of Education.
The university originally chose the FFEL program because it offered more benefits than the direct loan program. With the exception of a few lenders, these benefits are no longer available. The instability of the economy has forced many lenders to reduce their subsidies and stop offering benefits and other services to students and parents taking out loans.
"There was a lack of profitability for students," Main said.
Many vendors were forced to fire customer service representatives, and as a result, customer service declined, said Victoria Hampton, the assistant director of loan programs at the Office of Financial Aid Services.
The direct loan program, funded by the U.S. Department of Education, will be a much better option for students and their parents because it will be a smoother, more streamlined process.
"It will be easier, in my opinion, because it will be one point of contact," Hampton said. "We are switching to the direct loan program so students can have a more seamless process."
Another advantage of the direct loan program is that it offers an income-contingent repayment plan. The standard repayment is 10 years, but borrowers can request changes to their payment plan by providing documentation of their income. To request a change, they submit W2 forms, income tax returns or pay stubs. If accepted, the payment amount will be adjusted based on their income. Main was unsure of the cut-off point for this payment plan.
"It fluctuates every year," she said.
The direct loan program is a guaranteed source of funding for student loans.
"Every assurance has been made to us that the funding will be available to fund these loans," Main said.
Another advantage to the new program is lower late fees. Unlike the FFEL program, where fees range for, the Stafford loan, from 0.5 to 1.5 percent depending on the lender, the direct loan program has one flat fee of 0.5 percent for Stafford loans. For the Plus loan, there is a 2.5 percent fee under the direct program, and a 3 percent to 4 percent fee under the FFEL program. Under the FFEL program, lenders can choose to subsidize part of the fee according to UConn's financial aid Web site.
"The majority of lenders don't do that," Hampton said.
According to the Web site, interest rates for the Stafford loan are the same for both programs but for the Plus loan, the interest is 0.6 percent lower under the direct loan program, at 7.9 percent.
The criteria for federal loans under the direct program will be the same as under the FFEL program. Students interested in getting a federal loan fill out the Free Application for Federal Student Aid (FAFSA) and receive notification of their eligibility in February or March. If they are approved for loans, they will have to fill out a Master Promissory Note (MPN). Current students with federal loans will have to fill out a new MPN rather than simply renewing their loans.
For now, the university believes that the direct loan program will be used in the long run.
"However, if profitability returns to the FFEL program, we would consider switching back," Hampton said.
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