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Loan fees may rise

By Dmitri Pikman

May 5, 2004 9:00 p.m.

University of California students may face higher fees for their
student loans due to the possibility that the UC system may
withdraw from the Federal Direct Lending Program.

The program, created by Congress in 1993, mandates that colleges
provide loans directly to students without going through a third

California higher-education institutions are talking with Gov.
Arnold Schwarzenegger to determine whether they will switch over
from direct lending to the EDFUND system, something the governor
believes will benefit California’s economy.

EDFUND is a nonprofit organization which works together with the
state’s Student Aid Commission to guarantee loans to
students, in effect paying the loans if students capitulate on

According to a report released by the California Student Aid
Commission, the amount of revenue lost to direct lending in
California between 1997 and 2003 totaled $150.9 billion.

Currently, the UC and California State Universities do not
contribute to EDFUND because they participate in the Federal Direct
Lending Program. Money used in the direct lending system goes
strictly toward future borrowing, not the state.

Hanan Eisenman, spokesman at the UC Office of the President,
said the UC chancellors are talking with the governor now to review
the matter.

“We have been talking with the Schwarzenegger
administration about the long-term financing of public higher
education, and a large number of subjects are part of the
discussion, including the organization of financial aid,”
Eisenman said.

“We have not reached a conclusion,” he added.

Cheryl Resh, director of financial aid at the University of
California, Berkeley, said she believes it is highly probable that
the UC system will withdraw from the direct lending program.

People involved in higher education say the potential move from
direct lending to EDFUND will come at the expense of students who
will be forced to pay higher fees to third parties.

Resh said if higher-education institutions pull away from direct
lending, they will have to arrange their borrowing through

“The students might be forced to pay more than they did
for direct loans,” she said.

The federal government requires that all its loans come with a 3
percent origination fee, but with direct lending, students only
have to pay 1.5 percent ““ the rest is covered by the

Additionally, since direct loans go from the government to the
schools with no third-party involvement, there is no need to pay a
1 percent guarantee fee, which would become mandatory if schools
withdraw from direct lending.

In February, the Student Aid Commission and EDFUND reached an
agreement with the federal government to waive the 1 percent
guarantee fee. But Resh said the 3 percent origination fee still
remains for all non-direct loans.

Rebecca Wasserman, president of the United States Student
Association, the country’s oldest and largest national
student organization, said direct lending makes it much easier for
students to get loans, and by moving away from the program, it may
become more difficult for students to attain access to higher

“We don’t think that the California budget crisis
should be solved at the cost of student access to higher
education,” she said, referring to financially disadvantaged
and minority students who are most affected by changes in student
loan policy.

Supporters of direct lending also emphasized the importance of
the program, stating that a move away from direct lending would be
harmful to higher education in California.

Michael Pons, spokesman for the National Education Association,
said direct lending has been beneficial to California for many

“Federal loan programs directly to higher-education
institutions have always made more sense to us compared to a loan
program that makes money for banks,” Pons said.

Ultimately, though, it is the universities themselves who will
decide whether they want to continue using direct loan programs in
the future, something Pons said should be encouraged.

“The concept of easily available direct loans makes sense,
but some institutions might still want to go with private
lenders,” he said.

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Dmitri Pikman
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