Greetings from the Financial Aid Office!

[Last week, we reported (see here and here) on the fact that some of the student loan industry’s most fervent supporters in the financial aid world are potentially putting their schools and students at risk by refusing to take even the initial steps to prepare for a possible shift to direct lending next fall. Since then, we’ve been wondering how these aid directors would explain their inaction to students. So, after hearing the comments that financial aid administrators and lenders made at last week’s Lexington Institute event and on the Finaid-L listserv, we decided to write up a fictional account of how these aid officials might explain themselves. We hope you enjoy it.]

Dear Students,

As you may have heard, we have recently taken action that could potentially disrupt your ability to obtain federal student loans next fall. But we want to assure you that there is absolutely nothing to worry about. Our good friends in the student loan industry have a sure-fire strategy in place to stop any efforts in Washington that would force us to change the way we do business. And for that we’re very grateful because we can’t imagine doing things any other way.

Here’s some background. Last month, we received a letter from U.S Secretary of Education Arne Duncan urging us to take at least the initial steps to become “Direct Loan-ready” for the 2010-11 academic year. As you may know, the Obama administration has proposed ending the Federal Family Education Loan (FFEL) program in favor of 100 percent direct lending. Under the plan, tens of billions of dollars in savings from making the switch, and eliminating lender subsidies, would be used to provide a substantial boost in spending on Pell Grants, which go to the most financially needy students. This may sound good but it won’t help us much because we don’t enroll many of those students. In other words, the upper middle income students we predominantly serve will be left out in the cold!

Now it’s not exactly clear where this legislation is headed. As of now the measure appears to be stalled in the Senate, where the never-ending health care debate drags on. But even if this bill doesn’t go anywhere, we won’t be out of the woods. That’s because a federal law that has been propping up the FFEL program over the last year and half — known as ECASLA — is set to expire in July and neither the Obama administration nor Congressional Democrats want to extend it. If lenders can’t get access to government financing to make federal student loans, the FFEL program will be sunk. At least that’s the excuse Secretary Duncan is giving us for why we need to be prepared to flip the switch. But we told him to take a hike. That’s a lot of nerve, telling us how to run a federal program that benefits students.

You see we used to be in the Direct Loan program more than a dozen years ago, and the program ran into some administrative difficulties. At the same time, Republican Congressional leaders tried to kill direct lending, and when that failed, they did everything they could to put it at a competitive disadvantage to FFEL, including preventing the U.S Department of Education from being able to market the program to schools and preserving generous subsidies for lenders that they used to woo financial aid offices like ours. So it is not surprising that we had lenders literally banging down our doors each week trying to convince us to switch back to FFEL. Some of the offers they made were just too good to pass up, and they are worth holding out for despite what the Obama administration says! [Enough said about that. We don’t want to get into any details just in case that jerk Cuomo gets hold of this letter — no offense intended, of course, Mr. Attorney General.]

Yes, we know that some of our colleagues in the financial aid world have made the switch to direct lending and say that it went much more smoothly than they had imagined. The problems we experienced a dozen years ago have long since been fixed, they say, and in fact are ancient history. But do we really want to take that risk? Our lender friends — at least those that in the student loan business because of the help they received as a result of ECASLA — say we shouldn’t. Because after all, what has the government ever done right?

So please don’t be worried about your loans because there’s really no need for concern. Our friends in the loan industry assure us that they can spread enough fear and confusion on Capitol Hill to convince Congress that a switch to 100 percent direct lending would lead to a catastrophic breakdown. But in order to help them, we must do our part. If enough colleges like us dig in their heels, and refuse to take even the most rudimentary steps to prepare, we may be able to help lenders scare lawmakers away from enacting any real student loan reform and maybe even get them to extend ECASLA for another year.

So have no fear. This is definitely a gamble worth taking. Because if there’s anything the loan industry does well, it’s spreading fear and confusion. What else do you think they hire those high-priced lobbying and communication firms to do?

Sincerely,

Your trusty financial aid director