The University of Texas at Austin Makes Transition to Direct Loans

Beginning with the 2010 summer term, The University of Texas at Austin will join thousands of U.S. colleges and universities in the William D. Ford Federal Direct Student Loan Program.

The university is making the move to ensure continuity of service for its federal student loan recipients in light of uncertainties surrounding the future of the bank-based Federal Family Education Loan Program (FFELP), according to Tom Melecki, director of student financial services.

Many lenders have withdrawn from student loans in the last two years, and federal legislation that could bring FFELP to an end as early as July 2010 is pending before Congress. About 90 percent of what the university's students and parents borrow comes from federal loans.

"Students who borrow to help cover their expenses simply cannot afford a disruption in the flow of loans on which they rely," said Melecki.

Under the direct loan program, loans are made by the U.S. Department of Education instead of the private lenders that make federal loans in return for federal subsidies.

Direct loans are largely the same from the borrower's perspective. Students and parents will have the same or better interest rates and repayment terms and conditions.

In general, the process by which students and parents obtain direct loans will be the same as they went through to obtain bank-based loans. But because students and parents will be borrowing from a new lender, federal law will require those who previously obtained federal bank loans to execute new promissory notes before obtaining their first direct loans. Student borrowers will also be required to undergo entrance counseling specific to direct loans. Borrowers will be able to complete their promissory notes and entrance counseling through online services provided by the Department of Education.

The university's Office of Student Financial Services will provide guidance on completing promissory notes and entrance counseling when it awards federal loans to students and parents.

"UT Austin recognized the possibility of the bank-based program ending several months ago," said Melecki. "For the last year, our offices of accounting and student financial services have been working on computer system and process changes to be ready to participate in direct loans."