College administrators face a student lending landscape in upheaval at a time when students are borrowing more money than ever to pay for college.

The Obama administration wants to end federal subsidies for private student loans, forcing colleges to shift to a direct-lending model from the government–and the House of Representatives passed legislation in September to make that happen. But the Senate has yet to take up the bill, and Capitol Hill staffers say that’s not likely to happen until after lawmakers resolve the health-care debate.

Now, the Education Department (ED) is trying to force the issue. Education Secretary Arne Duncan urged colleges and universities last month to prepare to use the government’s Direct Loan Program for the next school year. But college financial aid directors are split in their support for the switch, which could require the use of new software and training.

In a letter sent to thousands of colleges and universities on Oct. 26, Duncan pointed out that a law passed about a year and a half ago to ensure that students with financial need could get a loan even if their college did not participate in the federal direct loan program will expire in June.

“Congress acted quickly to provide the Department of Education with unprecedented temporary authority to directly finance loans made through FFELP [Federal Family Education Loan Program] lenders,” he wrote. “However, while there are encouraging signs that the financial markets are rebounding, the most prudent course of action is for you to ensure that your institution is Direct Loan-ready for the 2010-11 academic year. That way, loan access for your students will be assured.”

Some schools balking

ED provides software to help institutions make the switch, but colleges still must implement the software and train their staff members how to use it–a costly and time-consuming undertaking. Some financial aid administrators are hesitant to make the move for this reason, while others object on principle.

Clint Hanson, vice president for administration and director of financial aid at Thomas More College in New Hampshire, said his school does not plan to switch to the Direct Loan Program until there is a mandate from Congress.

“The primary reasons for not making the switch are, one, currently enrolled students will be forced into having two different loans–Federal Stafford and Federal Direct–when they graduate; and two, the current Federal Stafford Loan program is an example of a very effective and very financially stable public-private partnership in the delivery of student loan services to students,” he said.

Hanson, who has been a financial aid officer for 30 years, said he has seen numerous funding issues with federal student aid programs in the past, and he sees more significant issues ahead given the large national debt.

“It is clear that the negative perception of the Federal Stafford Loan program is a result of some overly aggressive proprietary lenders,” he said. “The irony is that if the Congress had not changed the law to allow nonprofit lenders like Sallie Mae to become for-profit entities, many of the excesses exemplified by the Sallie Mae model would have been avoided.”

Hanson said Thomas More has had a very positive experience over many years with the nonprofit organization it works with, the NHHEAF (New Hampshire Higher Education Assistance Foundation) Network Organizations. He said he believes allowing nonprofits to supply student loans is a sensible alternative to direct government lending.