A report issued on September 29 by the Government Accountability Office has concluded that a Congressionally ordered federal Web-based tool to help college students compare terms and lenders for federal and private student loans may be a significant challenge to implement and could be entirely unnecessary.
The 36-page GAO report says the tool, which is mandated by the Higher Education Opportunity Act (HEOA) of 2008, is no longer needed for federal student loan comparisons because all federal college loans are now issued directly by the Department of Education through the Federal Direct Loan program.
Student loan legislation contained within the Obama administration’s health care reform package that passed through Congress in March eliminated the third-party federal student loan program that had previously allowed private lenders to issue federal education loans on behalf of the government. With no private lenders originating federal student loans, there are no longer multiple lenders or multiple borrower incentives (like rate and fee discounts) for students to compare.
As for comparisons of non-federal private student loans, the GAO notes that prospective borrowers who seek private student loans may already have sufficient information readily available to them, both through their schools’ financial aid offices and through individual lenders’ websites.
Private Student Loans Take Back Seat to Federal Student Loans
Providing a private student loan search and comparison tool may also conflict with the Department of Education’s longtime financial aid message, as well as its re-aligned mission of being the primary provider of federal student loans.
The Department of Education has made a practice of encouraging families
to take advantage of all available federal financial aid — grants, work-study, and low-cost government parent and student loans — before turning to costlier private student loans. Placing a tool for finding and comparing private student loans on the Education Department’s website, the GAO points out, could lead some students or parents to mistakenly believe that the department is endorsing the use of private student loans alongside federal financial aid, even before a student’s federally guaranteed financial aid dollars are exhausted.
Furthermore, as the Education Department’s “federal financial aid first” message has gained traction and as fewer recession-stung borrowers have been able to qualify for credit-based private student loans, the use of private student loans has declined, further diminishing, the GAO argues, the need for the private loan comparison site.
According to GAO figures, private student loan lending decreased to about $12 billion in 2008–09, a drop of 50 percent from the volume of private student loans originated in 2007–08.
Online Comparison of Private Student Loans Faces Roadblocks in Practicality
Providing useful data on private student loans would require the Department of Education to secure the cooperation of a large number of banks and private lenders. Each lender has its own lending guidelines for its private education loan program, and almost all lenders regard their underwriting criteria as proprietary information.
A lender’s underwriting guidelines determine not only what kind of income and credit profile is required to qualify for the lender’s private student loan program, but what rates and fees an eligible borrower will qualify for: Borrowers with weaker credit will generally pay higher rates and fees than borrowers with very good credit.