Higher Ed Watch

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Higher Ed Roundup: Week of September 29 - October 3

Published:  October 3, 2008

Direct Loan Volume Soars in Response to Credit Crunch

Spellings Presents Plan to Shrink the FAFSA

Ed Dept. Underestimates Improper Payments to Lenders, IG Reports

New IRS Form Questions Colleges on Spending, Endowments

 

Direct Loan Volume Soars in Response to Credit Crunch

The Direct Loan program's volume has increased by nearly 50 percent this year, according to the U.S. Department of Education. In the wake of the credit crunch, roughly 400 schools have switched to Direct Lending from the competing Federal Family Education Loan program, bringing the total number of schools offering Direct Loans to 1,369. Overall, students at these schools have taken out $16.4 billion in loans this year, which is about 35 percent of the total federal student loan program volume. At its most popular in the mid-1990's, Direct Lending controlled nearly 40 percent of the total loan volume.

The Department also revealed his week that 10 FFEL lenders have taken advantage of the agency's loan purchase program first authorized in the Ensuring Continued Access to Student Loans Act (ECASLA). Lenders sold about 40 percent of this year's $30.6 billion FFEL volume this year back to the Department, and are working on selling most of the remainder, according to The Chronicle of Higher Education. In a letter to shareholders, Sallie Mae reported that it intends to use the program to finance all of its expected $20 billion in loans this year. The buyback program is designed to help loan companies secure financing by giving them the option of selling all or portions of new student loans back to the Department. By contrast, no schools has had to turn to FFEL's original backup plan, the overly complex and confusing "lender-of-last-resort system," which requires guaranty agencies to provide loans to students that have been turned down by conventional lenders .

Spellings Presents Plan to Shrink the FAFSA

U.S. Education Secretary Margaret Spellings unveiled a proposal on Wednesday to significantly simplify the process of applying for federal financial aid. Under the plan, which Spellings announced in a speech at Harvard University, the Department of Education would slash the number of questions asked on the Free Application for Federal Student Aid (FAFSA) from 120 questions to 27. In addition, the proposal calls for the agency to use year-old tax data so that the agency would be able to inform students about their aid eligibility at the beginning of their senior year in high school rather than at the end. These changes, Spellings said, should encourage low-income students to pursue a higher education rather than discourage them, as the current aid application process does. "We should be knocking down barriers, not putting up hurdles," she stated. "It starts with a new form." In an interview with Inside Higher Ed, Spellings said she said she hoped that Congress would give "careful consideration" to her plan.

Ed Dept. Underestimates Improper Payments to Lenders, IG Reports

The U.S. Education Department has dramatically understated the amount of improper payments it has made to lenders participating in the Federal Family Education Loan program, according to a recent report by the agency’s Inspector General (IG). Federal law requires government agencies to annually report on incorrect payments they have made to outside entities. According to the IG, the Federal Student Aid office’s Financial Partners Services’ division keeps changing the methodology it uses to estimate improper payment rates, and as a result, the estimates have varied wildly. For example, the Department claims that it made $258-million in improper payments to lenders and guaranty agencies in the 2006 fiscal year, but only $2 million in fiscal year 2007. The report goes into great detail about flaws in the Department’s methodology, but lays some of the blame on the overwhelming complexity of the FFEL program.

New IRS Form Questions Colleges on Spending, Endowments

Colleges will soon have to provide the Internal Revenue Service (IRS) with greater detail about their finances, including how they use their endowments and compensate top executives, on a new reporting form that the IRS said it will release shortly. The announcement came almost a month after Sen. Charles Grassley (R-IA) and Rep. Peter Welch (D-VT) convened a roundtable on endowment spending at which they asked the IRS to create a special 990 tax form for colleges. The lawmakers especially wanted the new form to include more questions on expenses, revenues, and use of endowment income. In addition to covering these topics, the new IRS questionnaire will asks schools about related business opportunities and lavish perks offered to employees -- at least in part to determine whether colleges are taking advantage of their non-profit status.

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