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Federally subsidized student loans moving from private banks July 1

By Sally Holland, CNN
  • As of July 1, government can no longer pay fees to private banks to handled federal loans.
  • Plan expects to save $68 billion over the next 11 years
  • Larger banks will still offer student loans, but interest rates will be higher
  • Students find switchover process easy

Washington (CNN) -- Big changes to how student loans will take place July 1, and while the students themselves aren't likely to notice much, taxpayers stand to save $68 billion over the next 11 years.

The changes -- part of the health care reform legislation passed by Congress in March -- moves all taxpayer-backed college loans for students to the Department of Education and away from private banks. The legislation directs the federal government to stop paying fees to private banks that handle student loans.

Although most schools of higher education have traditionally offered a mix of both private bank loans and direct loans from the U.S. Department of Education, a few schools had to start from scratch to provide the direct loans.

Susan Fischer, director of financial aid and the University of Wisconsin in Madison, said that the school has made the changes to its computer system to handle the direct loan switch. They also have a big push to tell their students that they need to sign a new loan document promising that they will repay the balance.

Wisconsin-Madison began the transition last July, before the Congress voted to change all loans to direct. At the time, students were having problems with student loans from banks because the banks were having financial difficulties, according to Fischer. She said that one day a student would have a loan and the next day he wouldn't because of the instability of the banks.

"Because of the economy, the banks were no longer able to make the commitment to stay in the program," Fischer said.

The university began using the direct loans exclusively during this summer session. So far, according to Fischer, it has been going "swimmingly." Traditionally, fewer students are enrolled in summer school than in the fall and winter sessions.

So the real test to the new system will come this fall when the university's student population who need to sign the new promissory will jump to 14,000.

Danielle McMahon, a sophomore at the Wisconsin-Madison, said the whole process took her about 30 minutes, during which she read through the documents on the Education Department's website and electronically signed the document.

"The only difference for the student is the name, basically," she said. But, it is critical that students who are switching to the direct loans actually take that step.

The big losers, under the new legislation, will be banks who lose student loan subsidies that they have been receiving from the government.

Larger banks like Wells Fargo and U.S. Bancorp say that they will continue to offer private student loan products, including loans without federal subsidies. Those private loans can be used by students who don't qualify for the federal loans or need money to fill in the gap between federal government allotment and the total cost of college. These loans will not have the attractive interest rates that the direct government loans have.

Although in the short term some large banks may have suffered a loss of jobs and income under the new student loan legislation, Wells Fargo spokeswoman Lisa Westermann expects that in the long term, they will be able to bring loan servicing in-house and that should create more jobs.

As of Wednesday, Wells Fargo stopped accepting federal loan applications.