President Barack Obama recently signed a bill into law that aims to overhaul student aid by implementing direct student lending at colleges across the nation.
But this won’t mean much of a change for the University where direct student lending has been in place for years. In fact, current and former University officials were involved in the development of the concept of direct student lending, and the University served as a testing ground for the program.
Thomas Butts was the director of the University’s Student Financial Aid office from 1971 to 1977, and later, the deputy assistant secretary for Student Financial Assistance for the federal government during President Jimmy Carter’s administration from 1977 to 1981. Butts then worked in the University’s Office of Government Relations in Washington D.C. in the early 1990s, during which time he collaborated with former State Rep. William Ford (D–Mich.) to develop a direct student lending pilot program for select schools across the nation.
In 1994, the University became one of 100 schools to take part in the direct student loan initiative. According to Butts, the decision to take part in the program was largely due to the desire of former University President James Duderstadt to change financial aid programs at the University and asked Butts for help in getting this accomplished.
“My role was to develop this idea of the direct loan program and I brought that in and developed it with other colleagues to get it enacted, which we did,” Butts said. “But we were never able to achieve the goal of transforming the student loan programs into one program that worked well for students and schools and taxpayers until the (recent overhaul) bill was passed.”
Butts said another key feature of the new legislation is its reallocation of federal funding toward education and the increase in the amount of money available for grants.
“One of the things that’s most important about (the bill) isn’t necessarily that direct lending is now in place, but the fact that it has redirected well over $60 billion to education programs and a variety of other things, particularly Pell Grants.” Butts said. “That is a major accomplishment.”
The bill — together with the health care bill signed by Obama on the same day — aims to save taxpayers an estimated $61 billion over 10 years by getting rid of bank subsides. As outlined by the legislation, the conserved funds will then go toward increasing student loans through Pell Grants, health care reform and reducing the national deficit.
The legislation also eradicates the Federal Family Education Loan Program at colleges across the country and replaces it with the Direct Loan Program, allowing the federal government to give loans directly to students without banks serving as middlemen.
Butts called this a historic piece of legislation for the country and a “transformational moment in the history of financing student financial aid.” He compared it to past student aid initiatives that are still in place today like the establishment of the National Defense Student Loan Program — now known as the Perkins Loan — in 1958, the work study and supplemental grant program founded in 1965 and the Pell Grant program established in 1972.
Margaret Rodriguez — senior associate director of the University’s Office of Financial Aid — worked in the Office of Financial Aid while Butts was in Washington developing the pilot program. After he successfully launched the program and secured a spot for the University among the 100 schools chosen for the initiative, she took on the role of implementing the program on campus.
Rodriguez said that for many years, she and her colleagues were working toward incorporating a direct student lending system to the financial aid process for University students.
“Many of us in the financial aid office at the time had advocated for the program because we felt it was a better way to provide federal loans to students and certainly cheaper for the taxpayers,” Rodriguez said.
While the University won’t be seeing many changes in terms of student lending as a result of the bill, Rodriguez said students will still benefit from increased funding for the Pell Grant program, as well as the expansion of eligibility. The Department of Education recently issued a payment schedule for the Pell Grant program that will go into effect in the fall, she said.
“We’re going to see some immediate benefits from that,” Rodriguez said.
Edie Goldenberg, a Public Policy professor, wrote in an e-mail interview that the increase in funding for Pell Grants will provide assistance to universities who are currently using money out of their own budgets to give more financial aid to students.
“Universities that were meeting financial need with internal resources should experience some relief in their financial aid dollars,” she said.
The legislation also includes the Income Based Repayment Plan, which will allow students who enter a job in the public service sector to pay a maximum of 15 percent of their income toward loans, with any remaining debt being forgiven following 10 years of work.
Rodriguez said she thinks the program will play an important role in allowing students to chose a career based on interest, rather than selecting one based solely on salary in order to pay off student loans.
“I certainly do think it will be an effective initiative and that it is a wonderful option to be able to offer students who are repaying their loans so that their employment choices can be made with less regard to what their student loan burden is,” Rodriguez said.
Ultimately, Rodriguez said she thinks this has been something that students and policy makers have been anticipating for years and she was happy to see it finally pass through the United States Senate.
“I think it has been a long time coming,” Rodriguez said. “I think the House was very forward-thinking in passing this legislation last fall and we’re glad that it was able to be passed through the Senate.”
Pamela Fowler, executive director of the University’s Financial Aid Office, mirrored Rodriguez’s sentiments and said she is glad to finally see the bill become law after working toward it over the years.
“We have worked long and hard since the Clinton administration, when this program began, to have the direct loan program nationwide,” Fowler said. “For those of us that have been working really hard to support the direct loan program, we’re very happy that this has finally come to pass.”
The switch from a bank-centric system to direct loans means the legislation will be detrimental to banks as they begin losing profits they previously garnered from the student loans, according to Goldberg. And while bank executives will be upset with those lawmakers who helped pass the legislation, it will ultimately be a positive situation for the nation, she wrote.
“The losers here are the banks, which were realizing profits while the federal government was assuming the risk,” Goldenberg wrote. “Major banks will not be happy with the Democrats, but they already tend to support Republicans anyway.”
Despite angry responses among some Republicans and other opponents of the legislation, Butts said he thinks the legislation will eventually gain support all around, much like the Pell Grant program did in the 1970s.
“I think it’s going to provide a good, stable source of funding for federal student loans and that … this program will gradually have the support of all the participants in higher education,” Butts said.