Starting next semester the Financial Aid Department at Sacramento State will change its source for student loans.

This semester, loan funds were processed through the Federal Family Education Loan (FFEL) Program, but the campus will be switching to Federal Direct Loans in the fall.

FFEL program loans are funded by private lenders and guaranteed by the federal government. Borrowers repay the loan holder or its agents like banks and private companies. The government subsidizes these loans to ensure funding is available for college students.

Direct Loans are funds borrowed directly from the U.S. Department of Education. Borrowers repay loans to the department. President Clinton started the program in 1993, but the program still only accounts for a fraction of federal student loans.

“The Direct Loan process is much more streamlined,” said Financial Aid Director Craig Yamamoto. “It just makes things easier for everyone involved.”

FFEL program loans account for three-quarters of all student loans.

President Barack Obama’s budget wants to end the government subsidies to private lenders by 2010. While the Obama administration estimates that eliminating these subsidies would save the government $4 billion a year, new research suggests even larger savings.

The Congressional Budget Office has concluded that the president’s proposal to end guaranteed student loans will save taxpayers $94 billion over the next 10 years, according to a March 30 article by The (Fond du Lac, Wis.) Reporter.

FFEL program supporters disagree with the savings estimates, and have said that private lenders provide better customer service than the Department of Education.

“The federal government thought that the lenders were making too much money,” Yamamoto said. “If you take away the incentives the lenders stop giving students benefits.”

These benefits include offering incentives to borrowers who make payments electronically and reduce processing fees.

Yamamoto said that without the added perks to borrowers, the FFEL program loans have more disadvantages than advantages. Direct loans have a faster turnaround time for problem resolution and quicker disbursements. This means students get their money faster.

“Direct Loan funding is not tied to the students, instead there is a big pot of money for the whole campus,” Yamamoto said.

The campus gives an estimate of how much money it will need and Direct Loans gives the university that amount. Instead of having each individual loan amount released at different times, the university will have funds available for all borrowers sooner.

In the past year, the number of colleges and universities using Direct Loan funding rose more than 50 percent, according to the Department of Education.

University of California, Davis, already uses Direct Loans for its students’ financial aid needs. American River College still plans to use FFEL program loans in the future.

“If we don’t have to make the switch, we want to stick with the program we have,” said Lana Foon, loan officer at American River College. “Unless the government gets rid of the FFEL program, we don’t have any plans to change to Direct Loans.”

Following Obama’s announcement on Feb. 26, share prices in the largest student lender, Sallie Mae, have gone down more than 40 percent.

Sallie Mae representative Martha Holler thinks her company still offers a different product than the government’s Direct Loan program.

“We can loan students more money than the current government loan limits,” Holler said. “The limits now do not account for how much college is actually costing people today.”

Holler said her company offers superior customer service and a wider array of resources for borrowers.

“There is help for you whenever you need it, online, over the phone or in person,” Holler said.

Students can continue to borrow from private lenders like Sallie Mae, but will have to fill out additional paperwork to do so.

The Financial Aid Department is planning its second phase of advertising and outreach in the weeks ahead.

“Now that we helped students apply for financial aid, the next step is getting them to turn in their documents before leaving school,” Yamamoto said.

Students planning to take out loans for the fall semester will need to redo the online loan counseling and sign a new master promissory note with Direct Loans.

Crystal Kirk can be reached at [email protected].