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Government takeover of student loans?
A graduation cap with money symbolizes student loans
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TESS VIGELAND: For most high school seniors, the hard work of getting into college is done. Applications and essays are in the mail. Now...they wait. And they worry, not just about getting in, but about how they're going to pay for it if they do.
The Project on Student Debt said this week that graduates owe an average of more than $23,000 when they leave school. With so many students taking on bigger loans, you might think lenders would be begging for their business. But Bank of America just joined a growing list of financial firms no longer accepting student loan applications.
Our senior business correspondent Bob Moon tells us banks are leaving the business to their rich uncle.
Bob Moon: If you've borrowed money for college from a bank or other financial institution lately, you can almost certainly thank Uncle Sam. The government has had to fill the gap as private funding has dried up. Now, the Obama administration wants to eliminate the cost of the middleman and make loans directly.
Scott Peterson is a grad student at Dominican University outside Chicago. And he says he'd welcome doing business directly with the government, since he's never understood the way things work now.
Scott Peterson: Well, it just doesn't make that much sense to me, basically. I mean, I'm getting federal money to help me go to school, but a private firm is basically just taking money from the government with one hand and giving it to me with the other.
Federal officials say they want to streamline a confusing bureaucracy. Bob Shireman is deputy undersecretary of education. He says the government should handle the application process and make loans borrowers can count on.
Bob Shireman: We need to be able to tell families and students that their loans are going to be there, and moving in this direction allows us to confidently say that families will have access to loans.
But the plan is facing fierce opposition from free market proponents. Take this jab posted on YouTube by the Competitive Enterprise Institute
Video by the Competitive Enterprise Institute: We at the federal government are proposing an entire takeover of the student loan industry. The Student Aid and Fiscal Responsibility Act of 2009 would give us the power to decide your educational future. Please give us the power, because we're the federal government, and we should control everything.
The direct loan idea has already passed the House and is nearing a Senate vote, likely by next month. And with the writing on the wall, some financial institutions are already abandoning the student loan business. Lately, a few panicked listeners have written in, wondering if they'll be able to get loans for college in the meantime.
Kevin Bruns heads the industry group America's Student Loan Providers. He says there's still plenty of student loan money and lots of ready lenders.
Kevin Bruns: There has not been a single student in this country that has not been able to get a guaranteed student loan throughout this credit crisis.
His group warns that thousands of financial jobs are threatened by the federal student loan takeover. But the Education Department's Bob Shireman says private enterprise would still get a piece of the pie.
Shireman: We make the loan directly, and then contract with the private companies to do the collection on these loans. So it's really moving from a government loan program to a government loan program, but run in a different kind of way.
The kind of way that the loan industry's Kevin Bruns says would kill healthy competition among private lenders.
Bruns: If there's no longer any incentive at the retail level to do a good job and to invest in making this process more convenient, what will happen to the service levels? Where will I go then? Well, you won't have anywhere to go.
The government already has a limited direct-lending option. Education Secretary Arne Duncan bragged about it to financial aid officers in Nashville this week.
Arne Duncan: We had independent surveys, customer satisfaction surveys, and they found that service in the direct loan program is comparable to or better than that coming from the financial services companies.
Whatever Congress decides, the government and industry leaders we spoke to say lawmakers won't leave students in the lurch. And one financial aid counselor told me borrowers shouldn't notice much change, because whether it's a public or private loan, the money's still green.
I'm Bob Moon for Marketplace Money.
Savings or profits? Keep in mind that the govt is able to borrow money that it lends to students for virtually nothing. Then it plans to still charge 5.6% for a sub and 6.8% for a unsub Stafford loan. The govt is making profits. I don't see in SAFRA where the interest rates that are charged borrowers being lowered to generate a real "savings" to students. These proposed "savings" will then go to create more debt for the tax payer in increased year around Pell Grants that students do not have to pay for. Where is the real accountability?
Let's not forget. It was the gov that allowed the financial system to pillage, with no oversight, that brought down a financial tool that allowed FFELP funding for the last 40 years. (Auction rate securities) I think it only fair that the gov puts something in place (ECASLA)while the system is being "fixed". And to another writer; so four schools were busted out of 5000 for kick backs and you condeem everyone? Sounds like a pretty good organization to me. Less than one percent of the schools. Find me less than one percent of any business that breaks the rules!!! JJ
The government is already making these decisions on student loans, at least federal student loans (a.k.a. Title IV financial aid). When a student/applicant fills out their application for federal aid (FAFSA), the application is reviewed by the Department of Education to determine if the student meets the requirements to receive federal aid (i.e. citizenship status, prior Title IV aid borrowing/re-payment status, income status). It's always been that way and is not changing. The current process is that the Department of Education determines the student's overall federal aid eligibility, the student must select a private bank/lender to borrow the funds from (and this lender must go on the government's decision and determination and has no determination or say of its own in this process if the student selects them as their lender), and just like it was described in the news piece, the bank/lender borrows the money from the government with one hand and immediately lends it to the student with the other, and in the process collecing all the eligible interest payments and processing fees on the loans (some are paid by the student, some by the government). The suggested changes in policy are that the private bank/lender would be cut out of this process, which since they are essentially acting as a needless middleman, makes sense, and the student would be able to borrow the federal aid directly from the government, which would cut down on the processing time of the aid as well as the fees paid by the student and government (resulting in the savings that can be put towards the Pell Grant and other aid programs). Even now, once the private bank/lender actually disburses the loan to the student/student's school, many banks/lenders sell the loan/debt back to the Department of Education and let the government deal with the repayment/collection process with the student. So really, the private bank/lender really is a needless and costly middleman that can and should be eliminated.
However, all of this is only regarding federal financial aid/Title IV funds. If a student is still in need/want of private student loans, that still begins and ends with the private banks/lenders. The banks/lenders determine the applicant's eligibility, much the same as they would on anyone applying for any other type of loan, and the government has almost nothing to do with this process except to set a standard limit of the amount a student can receive in this private loan amount depending upon the direct and indirect cost factors associated with the school the student is attending (which puts the limit the student may be eligible to borrow well above the standard tuition and fees in any situation). This process is not changing based on any of the aforementioned proposals, because it is not a part of the Title IV aid a student is eligible for. Students will still be able to borrow student funds in addition to the Title IV fundging they may be receiving by dealing directly with private banks/lenders. The biggest changes in this process that are occuring are directly related to the overall credit crunch and lending freeze that banks/lenders and borrowers are experiencing across the board.
As a student financial aid professional, it was very frustrating to hear this article as it did not clearly explain and define the differences between Title IV student financial aid and private student financial aid and how the proposed changes would affect each type of aid and their associated processes (essentially only affecting the Title IV aid process and not the private student aid process). It seems the basic level of reporting on this issue (i.e. accurately describing the issue) was not met by this reporting team and I am sincerely disappointed in their output. This article is on the same level as the media output referenced from the Competitive Enterprise Institute and does nothing more than muddy the waters of the debate and make a clear understanding and resolution of the issue, in either direction, out of reach.
The point of SAFRA was to make college more affordable. This change to DL will not make Higher Education one pit less expensive. Period.
Is it fair that the student that took our a loan because they couldn't afford college have to pay for the increase of the Pell receipient? The middle class or "working poor" shouldnt have to subsidize the neediest. Instead of the gov putting money in all these other places they should have increased the number of people that could be eligible for Pell. Even if they had to decreased Pell.
You think a student that gets another $500 from his Pell is going to tell the school "I'll just take $3500 for my unsub, since I just got an extra $500 from my Pell? Of course not. Students will still take out just as much money for loans.
And know, since the gov took away the repayment incentives that private lenders were offering (competetion) higher Education, is in fact, more expensive than it was.
There does nees to be changes made but what the gov is doing with the savings er profits is not to make education more affordable.
Also, the entities that will be working for the gov...the rationale that few people will lose their jobs, and not the expected 35k. You think someone is going to move to another state for a 25k a year job? Get real.
Higher education is now more expensive for the middle class. The system is set up for the rich and the poor. So, make the middle class poor, and the poor the "working poor". Sounds like a great plan!
JJ
While some commentators are concerned about "affordability for the students", let's not forget affordability for the taxpayers. This is another program to shift money from one group to another. Have we decided this should be done in unlimited fashion? Should there be a limit to the number of people? to the number of dollars? to what mechanism is used to define a valid recipient?
Assuming the govt is qualified to make these decisions for us is flawed, or lazy, logic.
We let the federal government create FANNIE MAE and FREDDIE MAC, and look how well that worked out! ED just apologized last week for sending out thousands of letters to students telling them that their loans were due while they were still in their grace periods. Does that sound like efficient management? Lastly, we are told that the "savings" from this change will go towards Pell grants. When is the last time any savings were realized from any federal program?
Is it just me or isdoes anyone see a problem with the word "loan". I mean what we are essentially saying is who is going to indebt our children our government or the banks ? If I had to choose the best between two evils I would say the bank. Uncle Sam can exact it out of your check directly whenever he wants to and there is really nothing you can do about it. A bank has to get permission to do that but, better than both options how about more programs that helps parents pay for there students college while they're still in grade school and make them more aware of the programs that are already there. Who says such a program has to be tax deferred mabye it can be a credit towards retirement, Social Security, a tax relief for four yeaers when your child starts there collagite education. The ideas of loans all together has become to engrained into our minds. We need to rethink how students pay for college.
Three important points were overlooked in this story. The Federal government is making billions of dollars in both the Direct Loan Program and FFEL Program. Interest rates for Parent and Graduate PLUS Loans are set at 8.5% in FFEL and 7.9% in the Direct Loan Program. These rates were raised to pay for temporary benefits and represent a significant and unnecessary tax on middle class families. Federal borrowing costs are at historic lows-- between .5 and 3% depending on the index used. The rest is largely profit. Second, there have been several recent problems with the Direct Loan servicing. Most recently FSA announced that just before Thanksgiving they moved an unnamed number of students incorrectly into grace and repayment status. Third, the services provided by the Federal government are significantly less comprehensive than those provided by non-profits in the FFEL program. Loss of these services will have a very negative impact on low-income families.
I agree with Martha, and think Mr. Moon needs to work a bit more on the stories he provides. Simple "the govt guy says this, the 'free market' think-tank guy says that" constructions leave out context, as Martha pointed out, and leave numerous questions begging. In this case, the questions begging to be answered are about affordability for the student, and the amount of extra cost the 'free market' middleman heaps onto the process. If you're doing a story and find obvious questions unanswered, you need to fix it.
What some people call "healthy competition among private lenders" also resulted in colleges getting kickbacks from banks for steering students toward particular banks. My own federal loan back in the LBJ era of 1964 came directly from the federal government and was very efficient -- it didn't have the "middle man" that developed later when banks were crying for easy ways to make money (after all, most students in '64 didn't have credit cards). Why do people think this is a new role for government when it started out that way? Taxpayers had a right to complain later when unnecessary financial institutions were put in the middle of the process so they could collect fees that didn't exist previously.
