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Is Student Loan Reform Dead?

Mar 8, 2010 Jennifer Williamson, Distance Columnist | 0 Comments

The Student Aid and Fiscal Responsibility Act, introduced by Representative George Miller of California in 2009, promises to cut banks and financial institutions out of the student loan game.  Currently, the federal government allows private financial institutions to give out federal private student loans—and guarantees up to 97% of those loans—meaning that if the student defaults, the government will pay about 97 cents to the dollar for all lost funds. This is a great deal for banks, because they can loan with essentially no risk—they earn interest over time on student loans and they don’t take a hit if the student defaults. It’s not such a great deal for the government—because subsidizing all those loans is costly. 

Under the new Act, governments would deliver loans directly to students, ending subsidies to banks and saving billions—which can then be used to expand aid for students. It’s estimated that the government could save up to $80 billion over a ten-year period—and about $40 billion would fund expansion of the Pell grant program, so more money would go to more students. The rest would mostly be given to community college and early-childhood education programs.

Books and Piggy Bank

In September 2009, the House passed the bill—and all looked free and clear for it to pass the Senate. However, since September, not much action has been taken on the bill. President Obama has urged the Senate to pass it, but he’s been more focused on health care reform—and lobbyists for the student loan industry have been using the time to strip off support for the bill in the Senate.

According to Sallie Mae, Nelnet and other student loan companies, the bill will cut thousands of jobs—and Republicans object to it because they claim it’s just another government expansion into what should be the realm of the free market.

The private student loan industry currently employs 35,000 people nationwide. Companies like Sallie Mae have been working to generate grassroots opposition to the bill by holding town hall-style meetings throughout the country, gathering signatures and presenting the act to the public as something that would eliminate jobs in an already-struggling economy.

According to one article in FDL Action, student loan industry lobbyists are spending money to gather support from both Republican and Democratic politicians—about $2 million in total has been spent already, with the funds being split fairly evenly on both sides of the aisle.

Is it a good thing that the bill may not go through? It depends on your perspective. If you’re a student or the parent of a student about to go to college, the bill is good news. President Obama wants to use the funding to give families a $10,000 tax credit to be applied toward four years of college, increase the amount of money students can apply for under Pell Grants, raise the low-income threshold to make more students eligible, and fund Income-Based Repayment programs. Under this bill, students stand to benefit the most.

The government stands to benefit as well. Eliminating subsidies to the student loan industry would save billions—and the funds would be redirected toward helping alleviate a national crisis in student debt.

If you’re against big government, however, the bill may look like a government takeover of the student loan industry—and many Republicans are claiming they don’t support it because it represents government interference in the free market. Still, how “free market” is the student loan industry at present if it’s already subsidized by the government?

The student loan industry claims it objects to the new Act because it could eliminate jobs. But there’s no specific data on how many jobs would stand to be eliminated. The student loan industry has been able to lend with practically no risk for years, because of government subsidies—and they may be more concerned about their own profits than the financial well-being of the students they lend to. Student loan reform may be in trouble, but it’s not dead yet—and hopefully whatever the result, it’s to the benefit of students and their families.


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