The application process for the Direct Stafford Loan is the same as that for traditional loans: students fill out an application for federal aid each year. Eligible students receive a promissory note detailing the terms of the loan. Thanks to new computer software, applications, promissory note information and payment data can all be processed electronically by the institution and the federal government. Through direct lending, the amount of a student's loan will be credited automatically to his or her account to pay for tuition, fees, room and board and other charges, with any remaining funds going to the student.
Ray Holbrook, director of Financial Aid at Tennessee Tech, says that because much of the data will be transferred electronically, the loan process will take considerably less paperwork as well as less time. Approval time may be reduced from weeks or even months to days. Corrections or revisions can be made by the financial aid office using a computer.
"It's going to take a team effort among the university's Financial Aid Office, the Business Office and the Computer Center to get this system functioning, but we think it will be worth it. For example, students will be able to get their excess aid checks (funds left over after tuition, etc., has been paid) on registration day."
Holbrook says, "Direct lending is an attractive option for students from both ends of the process. Not only can you get your loans more quickly and efficiently than before, but there are a wider variety of repayment options available with direct loans."
Students can choose to repay loans at a standard, fixed amount over a few years or through an extended plan that allows as much as 30 years. The graduated plan increases the amount of payments every two years for up to 30 years. The income contingent plan bases the monthly payment on the borrower's yearly income for up to 25 years. The program even allows students to consolidate both traditional and direct loans into one federal repayment plan.
Holbrook notes that traditional loans, known as Federal Family Education Loans, are still available to those students who wish to go that route. "However," Holbrook says, "based on the experience other schools have had, I expect there will be virtually one hundred percent participation with the direct lending program."
The University of Memphis was the first public institution in the state to offer direct loans in the first year of the program in 1994. Middle Tennessee State University, Motlow State Community College and Tennessee State University joined the program in 1995. Tennessee Tech was accepted into the program earlier this month. Financial aid administrators have undergone intensive training programs to prepare for the change.
Tennessee Tech currently handles about $13 million in student loans. Tennessee Tech students' current default rate of 5.9 percent is among the lowest student loan default rates in the country, with a national average of 11.6 percent.