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Ask the Times: What's going on with my student loan? 

Q: I recently received a letter from the Student Loan Guarantee Foundation of Arkansas telling me that effective Oct. 1 my student loan would be transferred to something called Great Lakes Guaranty Corporation. When I called the Student Loan Guarantee Foundation of Arkansas, the person I talked to blamed Obamacare. What's this mean?

A: Ah, student loans. What undergraduate doesn't dream of that special day six months post-graduation when she receives a letter in the mail from some faceless financial services entity establishing the monthly terms of her indentured servitude for the next decade or two (or more)?

We empathize with the questioner. If you're one of the 37 million Americans saddled with student debt, receiving unexpected correspondence about your loans immediately raises your heart rate. It's similar to how a court-protected witness might feel about getting an unmarked package in the mail. So what exactly is the Student Loan Guarantee Foundation of Arkansas, and how is it remotely related to the health care overhaul?

Answering that requires some explanation of how federal student lending works and what has recently changed. For decades, there were two distinct ways the government provided student loans: direct lending and the Federal Family Education Loan (FFEL) program. Direct loans, as the name implies, flow directly from the government to students. FFEL loans are originated by private lenders — such as banks or Sallie Mae — but are guaranteed by the government. That means the feds act as a behind-the-scenes cosigner of sorts for students, agreeing to take over the loan in the event a borrower defaults on her debt. The FFEL program also gave subsidies to private lenders to keep interest rates below certain levels and cover some expenses.

In 2010, federal government eliminated the FFEL program in favor of doing all of its lending directly. Why should the public essentially hire banks as financial middlemen — and also eat their risk by insuring them against defaults — when we could simply provide students with direct loans?

Removing banks from the federal student loan business is expected to save $68.7 billion over the next 10 years. (Banks can still lend to students without the FFEL program, of course, but now that the government guarantee gravy train is over, they're much less likely to do so.)

The Student Loan Guarantee Foundation of Arkansas is a nonprofit that was established to administer the FFEL program in this state. If our questioner defaulted on her loan today, SLGFA is the party that would inherit the bad debt from whatever bank had originated it. But eliminating FFEL renders organizations like SLGFA somewhat obsolete, and its board has made the decision to get out of the debt-management business and transfer its remaining portfolio of loans to Great Lakes, a similar organization that services loans primarily in the upper Midwest.

There are 35 such non-federal "guaranty agencies" across the country, and as the FFEL Program winds down in favor of direct lending, their future is unclear.

"We'll still show up as guarantor until October 1st,"said Becky Collins, chief compliance officer at SLGFA. "Borrowers really shouldn't see any difference in their servicing if they're not defaulted. If they do default, that collection would move over to Great Lakes." She wouldn't say for certain what would happen to SLGFA itself after its portfolio is transferred. "That's a decision for our board," she explained.

Some readers may wonder why they don't recall hearing about such a massive overhaul to a program that affects millions of Americans. Well, if you think back to 2010, the political conversation was exclusively focused on another, even more massive overhaul: Obamacare.

The elimination of the FFEL program was actually a part of the Affordable Care Act, which draws a small portion of its overall budget from the savings created by student loan reform. Out of the $68.7 billion (again, over a 10-year period) that the government is saving by removing banks from the system, about $36 billion will go right back into higher education in the form of more Pell Grants. $3 billion is slated for aid to historically black colleges. A little over $10 billion will be used for deficit reduction. And $8.7 billion will go toward health care reform.

So did Obamacare kill the Student Loan Guarantee Foundation of Arkansas? In a sense. Bundling student loan reform into the ACA was a matter of convenient timing for Democrats; the elimination of the FFEL program was probably due to happen anyway. But unless you work for a bank or a guarantee agency, it's hard to see the end of the FFEL program as anything but a net positive for the public. For those with student debt currently, the change makes no difference.

Collins adds that anyone with student debt can check on the status of his or her loan — who originated it, who services it, etc. — with the National Student Loan Data System, at nslds.ed.gov.

Support for education reporting provided by the Arkansas Public Policy Panel.

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