Student loans to help pay for healthcare reform…AND lower the deficit?

This article was published on March 26,2010 in The Hullabaloo.

Along with the major health care reform bill, the House of Representatives passed legislation Sunday that will completely revamp the student loan industry.

Under the new plan, students will borrow money directly from the government, eliminating middle-man private lenders that currently profit by approximately $70 billion each year from college student loans.

According to the Congressional Budget Office, the direct federal loans will save taxpayers $61 billion during a 10-year period. This money will help pay for the accompanying health care bill and fund bigger Federal Pell Grants for more students.

Pell Grants, which students from families earning under $45,000 per year are eligible to receive, are scheduled to rise from a maximum value of $5,350 to a maximum value of $5,975 by 2017.

Under the present conditions, the Federal Family Education Loan Program enables low-and middle-income students to take out private loans with relatively low interest rates, thanks to government subsidies.

Independent of the recent legislation, however, the Tulane Financial Aid Office had decided in 2009 to switch from participation in the FFELP to the Federal Direct Program for all federal student and parent loan programs, effective with the upcoming 2010-2011 academic year.

“For many years Tulane has participated with banking institution lenders in the FFELP in large part due to borrower benefits offered,” according to the Tulane Financial Aid Office Web site. “Recently, banking institution lenders have scaled back borrower benefits.”

In addition to reducing borrower benefits, some private lenders have also exited the program in recent years, drastically complicating the process for students. When Whitney Bank left the FFELP a few years ago, for example, Tulane students using Whitney loans to attend school had to select a new FFELP lender and complete a new master promissory note, binding them to another contract and more debt.

Despite the proposed drastic changes, however, Tulane is optimistic that the new system will be much easier on students and on the university.

Tulane anticipates that the move to the Federal Direct Loan program will offer more efficient student loan processing and disbursement,” said Michael Goodman, the associate vice president of university financial aid. “Federal student loan processing from the student’s perspective should prove easier, as the need to select a participating lender will no longer be required. During repayment, students with both FFELP and Federal Direct Program loans have the option to consolidate the loans together for simplified billing.”

A major change resulting from the approval of the new bill is the elimination of the selection process. Students will no longer be able to shop around between private lenders, and lenders will no longer be able to choose which students to whom they offer certain benefits.

“The government could potentially be an equalizing force,” Tulane economics professor Alan Barreca said. “If a certain group of people have historically had problems getting loans because they’re considered ‘riskier,’ the policy could provide some redistributive benefits.”

Opponents of the new bill say it creates a lack of consumer choice in their loan.

“With any government programs, there are inherent inefficiencies,” Barreca said. “The question is whether it’s worth trading off efficiency for equality.”

The new policy will change the limit of income percentage that borrowers can pay back annually. Currently, borrowers must pay up to 15 percent of their yearly income in order to pay back their student loans. Under the new proposal, however, there will be a cap on 10 percent of borrowers’ incomes.

Sallie Mae, the largest private student loan provider in the country, announced Monday that it will have to start making “immediate” layoffs.

Tulane junior Carol Woods, a recipient of federal financial aid, said she does not feel sympathy for the corporations.

“They can find other jobs,” Woods said. “If this bill enables more students to be able to afford college, then it will be more beneficial in the end to our economy and society at large.”