(Dow Jones) Colleges aren't waiting for the U.S. Congress or the banks.
Most are becoming direct lenders to students to ensure that loans are available this fall.
"If they're not becoming a direct lender, they're getting ready in case they need to," said Haley Chitty, a spokesperson for the National Association of Student Financial Aid Administrators.
The schools want to be prepared if Congress makes it mandatory for them to become direct lenders or if more private banks pull out of the student loan market when the Ensuring Continued Access to Student Loans Act of 2008, or ECASLA, is scheduled to expire this summer. That legislation temporarily freed cash and made borrowing and repayment easier.
SLM Corp., or Sallie Mae, said last week when it released fourth-quarter earnings that it would be able to make loans even without the legislation. But that's not the case for other companies.
Colleges typically participate in the Direct Loan Program or the Federal Family Education Loan program. Funds for FFEL come from a bank or other lender that participates in the program. Funding for the direct loan program comes from the U.S. Department of Education.
President Barack Obama wants to eliminate the FFEL program and use the funds that potentially would've subsidized the private lenders to provide more grants for low-income students. The House of Representatives already has approved a bill, but the legislation has been stalled by the health-care debate.
But more than a year ago schools began switching to direct lending to fill the void left after many private banks and state agencies backed away from the student loan market during the credit crisis. However, the pace has accelerated, and in the last year there has been a 41% increase in the number of schools actively participating in the Direct Loan Program. By the end of 2009, 2190 schools had originated a loan in the program compared to 1556 at the end of 2008, according to the U.S. Department of Education.
Some schools remain loyal to FFEL, but those that have converted are finding the process easier than they had expected. A June survey of 167 institutions by the National Association of Student Financial Aid Administrators of schools that had made the switch within the last year found that 48% said they initially believed converting would be difficult. However, 80% of the 167 respondents later found the switch was easy.
While some private loans are still available, financial-aid offices recommend that families first consider federal loans because of their interest rates and protections. Private loans vary significantly because they're based on a person's credit score and interest rates could rise.