Pennsylvania's student financial aid agency prepares for its new role in servicing student loans

Pennsylvania's student financial aid agency prepares for its new role in servicing student loans
By JAN MURPHY, The Patriot-News
April 10, 2010

The name on the North Seventh Street building in Harrisburg will continue to say the Pennsylvania Higher Education Assistance Agency, but in time, many student loan holders will come to know it by the brand name Federal Loan Servicing.
That’s the place they will send loan payments to — and the one that will be after them if they stop making payments.
Creating this alter-ego of PHEAA was necessary for the agency to fulfill the large role it will play in the student loan overhaul that President Barack Obama signed into law last month.
That law ends the longstanding practice of banks making a profit off of serving as middlemen between student loan borrowers and the federal government. Starting July 1, the federal government becomes the sole lender for government-backed student loans through the direct lending program, a move estimated to save taxpayers $68 billion over the next 11 years.

The U.S. Department of Education has contracted with four agencies to service those loans when they go into repayment.
PHEAA, one of the nation’s largest student loan servicers, is among the agencies that landed one of those contracts. The others are SLM Corp. (known as Sallie Mae) of Reston, Va., Nelnet (National Education Loan Program) of Lincoln, Neb., and Great Lakes Educational Loan Services of Madison, Wisc. The four servicers were selected because they have the capacity to support and service the increased number of loans the department will own, according to the department. It estimates those loans will total $100 billion a year initially and grow from there.
At the education department’s request, PHEAA created the new brand, Federal Loan Servicing, so it could keep its work through this federal contract separate from the other $68 billion in federal and private student loans it services under the brand American Education Services, said James Preston, PHEAA’s president and CEO.
While the loan servicing operation’s workload is growing, Preston said the agency will cease on July 1 serving as a federal guarantor to insure student loans. This is a function associated with the Federal Family Education Loan Program that encouraged lenders to make low-cost loans to student borrowers who typically have little to no credit history. PHEAA employees who do that work will be trained to do other tasks, he said.

The agency also is looking for new business opportunities. He said it hopes to grow its servicing of private loans that students borrow to fill the gap between college costs and other financial aid.
“We are investing in that,” Preston said. “We have dedicated resources for that and we think we are one of the better [private student] loan servicers out there.”
The earnings that PHEAA makes are directed to its statutory mission of helping Pennsylvanians access to higher education.
It does that through such public service benefits as covering the $19 million costs of administering the $403.6 million state college grant program and other state financial aid programs.
When PHEAA’s earnings peaked at about $150 million in 2005 and 2006, the agency also dedicated a portion of its earnings — as much as $75 million in 2007-08 — to supplement the state funding for the state grant program. PHEAA’s board has indicated that it would like to resume that practice as soon as agency earnings allow.
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