Changes to student loans

When President barack obama signed the health care reform bill last week he also signed the Education reconciliation act – an act that eliminates a $60 billion loan program to be replaced by government lending to students.

“For almost two decades, we’ve been trying to fix a sweetheart deal in federal law that essentially gave billions of dollars to banks to act as unnecessary middlemen in administering student loans,” Obama told a crowd at northern virginia community College’s alexandria campus on Tuesday.

The bill negates the middlemen between the government and the students, and puts student loans in the hands of the U.S. Education Department.

As it stands now, the government pays banks and private lenders to distribute federally-backed loans to students.

Lenders receive a number of financial assistances known as subsidies, such as a loan processing and issuance fee, an account maintenance fee and a default aversion fee. Agencies also keep 16 percent of collections from defaulted loans.

Lenders are guaranteed a profit. Even if students default on their loans, the lenders get paid by the government.

In the 2008 fiscal year, the office of management and budget estimated payment to lenders for defaulted loans to be around $8.5 billion.

By eliminating the lenders from the transaction, the money flows directly from the government to the students. The government will be saving money by not paying out defaulted loans or providing subsidiaries to lenders.

“By cutting out the middleman, we’ll save american taxpayers $68 billion in the coming years,” said Obama. “Real saving that we’ll reinvest to help improve the quality of higher education and make it more affordable.”

It is projected that $36 billion will go to pell grants, the current under-funded federal aid program for students in low-income households.

Some will go toward reducing the deficit, and some to various community colleges, historically black colleges, and some will be helping to put a cap on loan payments.

According to the White House, “New borrowers, who assume loans after July 1, will be able to cap their student loan repayments at 10 percent of their discretionary incoming and, if they keep up with their payments over time, will have the balance forgiven after 20 years.”

Current loans will receive only the repayment cap and not the forgiveness plan. The current cap is set at 15 percent of discretionary income.

The plan has some foreseeable downsides, and critics have stated there will be inevitable job losses that will take place in the wake of the bill.

The bill includes $50 million in incentive payments to lenders to retain jobs. Additionally, lenders will still be receiving subsidies for the $500 billion in loans that are currently active. It is unknown how long this could sustain the private lenders.

Critics also wonder if the government can handle calls and questions from students, and if it can manage complete responsibility for the loan process.

The government’s management of student loans will start July 1, 2010.

Tags: northern virginia community,virginia community college,barack obama,issuance fee,northern virginia community college,alexandria campus,defaulted loans,private lenders,reconciliation act,american taxpayers,sweetheart deal,income households,health care reform,black colleges,pell grants,s education,office of management and budget,community colleges,account maintenance,middlemen

Thursday, April 01, 2010 |

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