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University of California students may face higher fees for their student loans due to the possibility that the UC system may withdraw from the Federal Direct Lending Program.

The program, created by Congress in 1993, mandates that colleges provide loans directly to students without going through a third party.

California higher-education institutions are talking with Gov. Arnold Schwarzenegger to determine whether they will switch over from direct lending to the EDFUND system, something the governor believes will benefit California’s economy.

EDFUND is a nonprofit organization which works together with the state’s Student Aid Commission to guarantee loans to students, in effect paying the loans if students capitulate on them.

According to a report released by the California Student Aid Commission, the amount of revenue lost to direct lending in California between 1997 and 2003 totaled $150.9 billion.

Currently, the UC and California State Universities do not contribute to EDFUND because they participate in the Federal Direct Lending Program. Money used in the direct lending system goes strictly toward future borrowing, not the state.

Hanan Eisenman, spokesman at the UC Office of the President, said the UC chancellors are talking with the governor now to review the matter.

“We have been talking with the Schwarzenegger administration about the long-term financing of public higher education, and a large number of subjects are part of the discussion, including the organization of financial aid,” Eisenman said.

“We have not reached a conclusion,” he added.

Cheryl Resh, director of financial aid at the University of California, Berkeley, said she believes it is highly probable that the UC system will withdraw from the direct lending program.

People involved in higher education say the potential move from direct lending to EDFUND will come at the expense of students who will be forced to pay higher fees to third parties.

Resh said if higher-education institutions pull away from direct lending, they will have to arrange their borrowing through EDFUND.

“The students might be forced to pay more than they did for direct loans,” she said.

The federal government requires that all its loans come with a 3 percent origination fee, but with direct lending, students only have to pay 1.5 percent – the rest is covered by the schools.

Additionally, since direct loans go from the government to the schools with no third-party involvement, there is no need to pay a 1 percent guarantee fee, which would become mandatory if schools withdraw from direct lending.

In February, the Student Aid Commission and EDFUND reached an agreement with the federal government to waive the 1 percent guarantee fee. But Resh said the 3 percent origination fee still remains for all non-direct loans.

Rebecca Wasserman, president of the United States Student Association, the country’s oldest and largest national student organization, said direct lending makes it much easier for students to get loans, and by moving away from the program, it may become more difficult for students to attain access to higher education.

“We don’t think that the California budget crisis should be solved at the cost of student access to higher education,” she said, referring to financially disadvantaged and minority students who are most affected by changes in student loan policy.

Supporters of direct lending also emphasized the importance of the program, stating that a move away from direct lending would be harmful to higher education in California.

Michael Pons, spokesman for the National Education Association, said direct lending has been beneficial to California for many years.

“Federal loan programs directly to higher-education institutions have always made more sense to us compared to a loan program that makes money for banks,” Pons said.

Ultimately, though, it is the universities themselves who will decide whether they want to continue using direct loan programs in the future, something Pons said should be encouraged.

“The concept of easily available direct loans makes sense, but some institutions might still want to go with private lenders,” he said.