Archived: ED Announces Lower Student Fees on Direct Loans

A r c h i v e d I n f o r m a t i o n

FOR RELEASE
June 16, 1999

Contact:
Stephanie Babyak (202) 401-2311
Jane Glickman (202) 401-1307

ED ANNOUNCES LOWER STUDENT FEES ON DIRECT LOANS

More than 2 million students will be eligible to save an average of $631 on their direct student loans, as a result of three discounts announced today by the U.S. Department of Education.

"Many students are struggling to pay their way through school, and every dollar helps," U.S. Secretary of Education Richard W. Riley said. "Meanwhile, many recent graduates are burdened by heavy monthly loan payments. We should seek every opportunity to help them save money on their loans and ensure that financial barriers do not preclude students from achieving their educational goals."

The package of discounts includes:

a one percentage point reduction in the up-front loan fee, also called the origination fee, that students in the Direct Loan program now pay. The origination fee will be reduced from four percent to three percent of the total loan balance;

a 0.25 percentage point interest rate reduction for borrowers paying electronically;

a 0.6 percentage point interest rate reduction for direct loan borrowers who consolidate their loans while they are in school, or during the grace period before they enter loan repayment.

The average total savings to the average graduate with a debt of $10,000 and a standard 10-year repayment plan will be $631 over the life of the loan. That student will save an estimated $100 on the origination fee; $157 for the interest rate reduction for electronic debit repayment; and $374 for the in-school or grace consolidation savings.

These discounts are similar to those now offered to students under the FFEL program by many lenders and guaranty agencies, and will help restore parity between the Direct Loan and FFEL programs.

"The Direct Loan program provides substantial cost savings to the American taxpayer due to the lower cost of Federal capital and the high subsidies paid to financial institutions participating in the guaranteed loan program," Riley said. "Students should benefit from these savings. We will keep looking for ways to reduce costs for students and provide strong and equitable service in both loan programs."

The education department announced these discounts following a Notice of Proposed Rulemaking (NPRM) published in today's Federal Register that confirms the secretary's authority to charge reduced loan fees to students in the Direct Loan program by providing them with discounts like the ones authorized for the FFEL program under the Higher Education Amendments of 1998. The secretary's authority is based on section 455 of the Higher Education Act (HEA), which provides that students in the Direct Loan program should generally receive the same terms, conditions and benefits on their loans as students in the FFEL program receive on comparable loans.

"We believe Congress intended to give students the same benefits for loan fee discounts in both the FFEL and direct loan programs," Riley said. "Providing students with similar benefits is good public policy and is consistent with our legal authority and the legislative history of the HEA."

Under the Direct Loan program, students borrow money for college and other postsecondary education directly from the federal government through their schools. Under the FFEL program, students borrow through banks and other third-party lenders, which, in turn, receive guarantees against default from the federal government. The Direct Loan program began in the 1994-95 school year and now accounts for about one-third of student loans.

The NPRM published today was developed through negotiated rulemaking, a process in which proposed regulations are developed by involving all interested parties affected by the issues. A negotiating committee consisting of some 28 negotiators—which included students, representatives of schools, guaranty agencies, FFEL lenders and the education department—worked for six months to develop and reach consensus on the regulatory provisions contained in today's NPRM.

###