People, Politics & Business

Scoundrels, Educrats, Rogues and Champions

Congress Passes New Student Loan Bill: Education Dept. "Flying Solo" Eliminating Banks

CJ Westerberg, March 26, 2010 9:17 AM


5/1/10  Update:  Via The Economist:  The Runaway Cost of College.  Link here.

5/1/10 UPDATE: 
"A dirty secret of the reforms, however, is that many of the private loan entities will continue to service all these loans, just under different terms.   But it will be the Department overseeing all this much more -- and being accountable for it.  So if the Department doesn't have the full time staff and expertise to really oversee this it could open the door to revisit loans again.  And that capacity comes from parts of the federal budget that don't get a lot of attention and where there is room for a lot of political mischief.  This year's budget requests more support for this function, so keep an eye on all that.  For appropriators on the Hill items that send money to states and districts are more interesting than items that send money to departmental management...and for people who want to discredit this reform this is where they're going to focus their attention, not on some malfunctioning website."
Via Eduwonk

Fierce Bank Lobbying Defeated! 
"Can DOE Handle It Solo?", asks NPR. 
Goal To Make It Easier For More Students To Get Loans

While we were all watching or hearing about the historic passing of health care legislation, another bill passed in Congress yesterday which affects the student loan equation:  The Department of Education will now be the provider of student loans exclusively, eliminating that shared role from banks.

Justification?  To allow more students access to loans and to prevent interest rates on those loans to soar.  If that doesn't sound like a good enough idea, The New York Times offers a quick explanation why we eliminated the bank brokering of student loans, with link to full article here:

"Ending one of the fiercest lobbying fights in Washington, Congress voted Thursday to force commercial banks out of the federal student loan market, cutting off billions of dollars in profits in a sweeping restructuring of financial-aid programs and redirecting most of the money to new education initiatives."

With that being said, NPR this morning had a few concerns about the process of it all, with link here to 4 minute podcast and excerpts below:

"We'll see how that goes," laughs Melissa Gregory, director of financial aid at Montgomery College in suburban Maryland. More than 22,000 students at her two-year college rely on government-backed loans. Gregory isn't sure the Education Department can handle the jump in student loan applications with private lenders out of the picture beginning July 1."
"Can they handle the service component? Calls from students, explaining things to students -- that will be a real challenge for the Department of Education," she says, "and it's one they say they're ready to handle."

Eliminating The Middleman

"It's not that the department hasn't done it before. The direct-lending program has been in place since 1993 and already accounts for almost half of all federal student loans. But that number will more than double in the next three months.

Yet The New York Times addresses this concern by offering these further details:

" . . .Although private banks will no longer be allowed to make student loans with federal money, many will continue to earn income by servicing those loans. . . "

". . .In lobbying fiercely against the overhaul, the private banks argued that it would eliminate jobs, even though the government will hire many of the same banks on a contract basis to service the loans and perform other back-office administration. Furthermore, the banks said that with the government as the only lender, students would not get the same level of service."

More general details via NYT:

" . . .The Congressional Budget Office said the direct-lending approach would save taxpayers about $61 billion over 10 years. Roughly $40 billion of the savings will be redirected to higher education. Education programs will get an additional $10 billion from the health care package. . ."

The original proposal stood to save $87 billion over 10 years by ending the bank-based program, known formally as the Federal Family Education Loan program. But as the Senate delayed in taking up the legislation, colleges and universities began shifting to the direct-lending program, realizing the savings to the Treasury up front and cutting the amount of money available for future spending.
. ."

Early childhood, community college funding, and work force related efforts were cut from final bill:

" . . .In the scaled-back, final version, the administration scrapped $8 billion in proposed spending on early-childhood education. It also mostly erased a $12 billion "American Graduation Initiative," which was announced with fanfare in the fall as an effort to bolster the work force by producing millions more community college graduates over the next decade, and building up high-quality free online courses.

Community colleges, the main provider of higher education for most low-income Americans, were slated to receive $10 billion under the administration's original plan, but will instead get just $2 billion for job training. . ."

What's your riff?  Too much, too little? 

  • Deacon John Wilson III

    I am the director of a community and faith-based Enrichment Program here in the inner-city of Los Angeles and have been effectively an independent financial aid and admission counselor for over 10 years.

    Here is something I have learned THIS YEAR in my work with parents and students:

    Parent Loans for Undergraduate Students (PLUS) Loans also became "Direct Loans" Only thanks to the "healthcare bill" Student Loan takeover. I have seen parents on AFDC/Welfare and with very recent Bankruptcies APPROVED for HUGE loans of $20,000 to $30,000 where they would not have been last year. 2 years ago I cringed when the FEDs allowed these loans to be deferred until after a student graduates...and I KNOW the loans will not be sustainable, much less repaid. Some of these loans have been well over $150,000 for four years with interest accumulating while the student is in school! How in hades can a working class parent pay this off......??????? I also know that colleges will increase fees and tuition once they figure out parents can more easily get these loans. I have also already seen parents using the PLUS Loan $$$$$ for non school uses and students are short on tuition, books or food!! You are basically placing THOUSANDS of unaudited dollars into the hands of parents who are poor or just stressed financially already, but, most importantly, cannot make payments like this!!

  • You seriously outdid yourself with this update. Color me impressed.

  • Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic. If possible, as you gain expertise, would you mind updating your blog with more information? It is extremely helpful for me.

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