Student loan organizations in Iowa are adjusting to a recently enacted federal law that significantly changes how federal student loans are originated and administered.

The Health Care and Education Reconciliation Act of 2010, signed by President Barack Obama on March 30, mandates that all federally guaranteed student loans must be originated through the Federal Direct Loan Program (FDLP). The law, which went into effect July 1, means no new loans will be made through the Federal Family Education Loan Program (FFELP), a program created by Congress in 1965 to provide federally guaranteed low-cost loans through private-sector financial institutions.

For the Iowa College Student Aid Commission, a state agency that has administered FFELP loans for decades, it could mean a reduction in other services it offers.

Karen Misjak, the commission’s executive director, said approximately 95 percent of the agency’s annual budget was paid for by fees it charged to administer FFELP loans.

Under that program, the financial institution puts up the capital and Iowa College Aid guarantees the loan. If the borrower defaults, Iowa College Aid purchases the loan from the lender and makes collection efforts on behalf of the federal government.

“We always considered ourselves a self-supported agency,” Misjak said. “We receive very little state-appropriated (money) to administer the state grant and scholarship program, and we received administrative fees from the federal government to administer the (FFELP). So that portion of it is going away.”

Iowa College Aid, which has been the state’s designated guaranty agency for FFELP since 1978, has guaranteed more than $10.8 billion in federal student loans. It currently administers a portfolio of more than $3 billion in outstanding loans, but the fee revenue it receives will taper off as lenders are repaid or claims on defaulted loans are paid to the lenders.

In addition to the FFELP, the agency administers 14 state-funded grant and scholarship programs for Iowa college students, the largest of those being the Iowa Tuition Grants program. However, the costs of administering those programs have largely been subsidized by fees the commission received from administering FFELP loans.

Iowa College Aid also provides families with educational materials about loan programs, as well as entrance and exit counseling on behalf of the colleges. “One of the things we’re extremely proud of is that we provide policy training, which means we have staff who understand the federal regulations and how to interpret them to help the financial aid offices make sure they’re administering the programs correctly,” she said.

Misjak said Iowa College Aid plans to seek additional funding during the next legislative session to administer those programs, which provide approximately $55 million annually in grant and scholarship aid to students. “We are in the process of putting together documentation to share with legislators as soon as the session begins,” she said.

In the future, the state agency will put a greater focus on student preparation for college, through programs such as Gear Up Iowa, Misjak said.

Laurie Wolf, executive dean of student services at Des Moines Area Community College (DMACC), said many private lenders in Iowa began retreating from the college loan market about three years ago.

“It wasn’t necessarily the decision of the local lenders, but more their boards of directors,” said Wolf, who currently chairs the National Association of Student Financial Aid Administrators (NASFAA). With the worsening economy, many banks chose to shift away from student loans, she said. In one instance last year, Western Iowa Tech Community College in Sioux City saw three lenders bail out over the course of 45 days. “Even though the federal government was saying, ‘We will back these loans,’ the lenders didn’t have the capital,” Wolf said.

DMACC is a longtime participant in the direct lending program. It shifted from the FFELP to the FDLP in 1994 and has been satisfied with the service it receives, Wolf said. “It is a stable lending mechanism,” she said. “You don’t have to worry about funds drying up.”

A relatively small percentage of DMACC students, 35 percent, receive any financial aid, and the majority of students find ways to pay for college without borrowing, Wolf said. Last year just 5,200 of the community college’s 35,000 students took out college loans, and the average student loan debt for a graduating student across all six of DMACC’s campuses was $5,600.

“They find other ways to pay for college,” she said, among them National Guard and employer benefits. “So the number is pretty small, when you think about our student population.”

As the volume of direct government loans increase, there is some concern that default rates will increase because there will be less local servicing of those loans.

The potential for increased defaults is a real concern, Wolf said.

“As we increase in volume (of direct loans), it’s our hope that the person on the other end of the phone understands what’s happening locally,” she said, using the state’s flood disasters as an example. Sen. Tom Harkin has been pushing for legislation to authorize a servicing office for direct loans in each state, she noted. “I would champion that, because it’s helpful to have someone locally who understands the local situation, and also in the same time zone and dialect as the person calling.”

On the horizon, Congress is now considering legislation that would make colleges more accountable for the level of debt their students graduate with, and penalize institutions that have too many students who graduate with heavy debt loads relative to what they will earn.

Though Congress closed a door with the reconciliation act, it kept a window of opportunity open, said Steve McCullough, president and CEO of Iowa Student Loan Liquidity Corp. The nonprofit organization owns or services more than 499,000 FFELP loans, which make up nearly $2.7 billion of its $4 billion student loan portfolio.

Iowa Student Loan is currently working with the U.S. Department of Education to apply for the opportunity to service loans that are originated under the Federal Direct Loan Program, he said.

“In being selected to take on this new role, we’ll continue providing Iowans with top-quality local customer service, college assistance programs and local jobs. We’re pleased that our federal leaders saw the value that we and other nonprofits provide students and families, thus allowing us this opportunity to continue our good work.”

When credit markets froze in September 2008, Iowa Student Loan entered into an agreement with 18 Iowa banks to create the Iowa Alliance Private Student Loan Program to fill the gap between tuition and available financial aid.

The program is one of several supplemental private loan options that Iowa Student Loan is providing, McCullough said. The organization is now working with banks to expand the Iowa Alliance Loan program to provide no-cosigner private loans over the next two academic years, he said.

“We’re also helping credit unions create their own private loan programs to assist students in their communities,” he said.