It’s time to set student loan limits

Tertiary Education Minister Steven Joyce indicated recently that the Government will look at tightening the “boundary” of eligibility for student loans.

He said his Ministry was considering measures such as introducing a “lifetime limit” on how much people can borrow and how long they have lived in the country before receiving the funds.

The current interest-free student loan policy was introduced after the 2005 election, and it has had a number of unintended consequences, making it worthwhile for the Government to re-examine the policy and its affordability.

The policy has given students little incentive to repay their loans.

Most students repay the minimal amount required each year, letting inflation and time erode their debt, at the government’s expense.

Well-off students, who do not require student loans, can exploit the facility by taking the interest-free loan unnecessarily and using it as capital to invest and earn their own interest. Young school-leavers who might otherwise have gone into trade or meaningful employment, sometimes find university an easier prospect, knowing they will be subsidised by interest-free government money.

This does them a disservice if they are not cut out for the university learning environment and may be better suited to more practical professions.

The difficulty with the interest-free student loan is that, like milk out of the bottle, it is incredibly difficult to reverse.

The Government should tighten its belt on fiscal spending, but would be extremely unpopular with students and graduates if they were to reinstate interest on student loans.

Therefore, the steps being indicated are small.

Canterbury University Vice-Chancellor and former Deputy Governor of the Reserve Bank of New Zealand suggests that the Government should go further by adjusting the loans for inflation so that students do not benefit from drawing out their repayments. According to him, the Government can save up to $200 million a year on this account, based on an assumed two percent inflation.

New College Loan Rules

President Obama signed the Student Aid and Financial Reconciliation Act (SAFRA) into law, following a long and controversial battle in the Senate. Much of the debate involved the proposal to terminate a program that provided subsidies to private lenders, and to move all federal lending to the Direct Loan (DL) program, with the savings from eliminating the subsidies being used to fund a number of other initiatives.

Many who opposed SAFRA were concerned that the actual savings from converting all loans to DL would be much lower than the Congressional Budget Office's estimate of $61 billion--and possibly non-existent. The CBO had to score the bill using some dubious assumptions, such as ignoring interest rate and market risks, as well as administrative costs. With the government overseeing a total student loan portfolio of $621.1 billion and growing, deficit hawks were concerned that the new spending initiatives would inflate the deficit.

Student loan reforms

When President Obama signed what is largely known as health care reform into law March 30, he also approved changes to the federal Direct Loan program that Hare said will save $61 billion over 10 years.

Starting July 1, all student Direct Loans will come from the federal government instead of private banks. Hare said banks have traditionally acted as third-party lenders, receiving about $9 billion a year in federal subsidies to participate.

"In contrast, this new law makes the government a direct student lender, cutting out the middle man," said Hare, D-Rock Island.

An estimated $36 billion of the savings will be invested in the Pell Grant program, Hare said, with an increase of about $61 million coming to Hare's 17th Congressional District.

The need-based federal grants will increase by $200 to $5,350 per student for the 2010-11 school year, and to $5,975 by 2017. Starting 2013, the grant amounts will go up each year on pace with the cost-of-living increases.

Cheryl Howerton, Millikin's director of financial aid, said she is eager to see the real-world implications of the reforms.

"We normally have a little bit of an increase" in Pell Grant totals, Howerton said. "What they're anticipating with this extra money is that the increases will be a little larger."

Questions Howerton posed to Hare were about which students qualify for the Pell Grant and who is considered middle class. Hare said he would have to do some research and get back to her.

New rules for recent graduates

We push our graduates out into the world with little or no financial education; that much has been true for years. Meanwhile, their student loan debt has grown over time, with the median debt for bachelor’s degree recipients who did take out loans hitting $20,000 in 2007-8, according to theCollege Board’s 2009 Trends in Student Aid study. This year, many graduates are being greeted by an uninterested shrug from employers as they try to pay that all back.

There is some good news this graduation season, though. In four crucial areas — health insurance, banking, credit cards and student loans — there have been enormous shifts in the legislative and regulatory landscape in the last 12 months. These changes should ease some of the pain as new graduates try to establish themselves financially.

So before you leave for your post graduation road trip (or buy yourself something nice for the first time in four years to celebrate the end of tuition bills), give the points below a quick skim. So much has happened in the last year, you’ve probably missed at least some of it.

In this scenario student aid must be there if not then students will not concentrate on their studies.

Editorial: Shift on student aid will pay off Read more

Overshadowed by the presidential signing of the historic health reform bill was a restructuring of the federal student loan program, signed last Tuesday.

While some private lenders understandably are squawking – the bill would end $8 billion a year in lucrative subsidies for them – much of the backlash is misplaced.

The latest legislation resolves what has been a running battle in the last half-century over which type of student loan program the federal government should offer.

Since the 1950s and 1960s, the federal government has offered two types: "direct student loans" (where the government makes loans directly to students) and "guaranteed student loans" (where the government pays fees to private lenders who make risk-free loans to students).

The legislation signed by President Barack Obama resolves the issue in favor of direct loans, signed originally by President Dwight D. Eisenhower in 1958. It would eliminate the more recent guaranteed loans, added in 1965.

This is not a new "government takeover" of student loans, which have been a government-subsidized program from the beginning.

The reality is that the direct loan program costs taxpayers a lot less than the guaranteed loan program. A 2005 U.S. Government Accountability Office study found that the federal government's cost in the guaranteed loan program is $9.20 per $100 in loans, compared with $1.70 per $100 in the direct loan program. That's a huge difference: five times more per loan in the guaranteed program – and it goes to lenders, not students.

The guaranteed loan program also has been plagued by scandal – state and federal investigations in 2007 that found that lenders were providing special favors, perks and kickbacks to get colleges to steer students to the guaranteed loan program.

According to the Congressional Budget Office, cutting out the middleman in favor of the direct loan approach is expected to save the U.S. government $61 billion over 10 years. That savings will be used to expand student financial aid (including the Pell Grant program).

Though private lenders fought the change, they will continue to benefit: They can compete to win lucrative contracts to service direct student loans.

For students, the direct loan program is easier: The college determines eligibility, sends out paperwork for signature and it's done. Interest rates for the 2009-2010 school year are 5.6 percent for financially needy students and 6.8 percent for non-needy students – and this will be reduced in coming years.

There are also cost advantages for middle-class parents. The Parent Loan for Undergraduate Students (for costs not covered by grants and student loans) has better interest rates in the direct loan program: 7.9 percent, vs. 8.5 percent for PLUS loans provided by private lenders.

Both the direct and guaranteed student loan programs are government programs. Neither is market-based. The issue is who should benefit from the government subsidies – students and taxpayers, broadly, or private lenders?

Read more: http://www.sacbee.com/2010/04/09/2665867/shift-on-student-aid-will-pay.html#ixzz0krukYgAf

Health Bill Is Rx for Student Loans, Too

(CBS) Part of the Democratic health care reform was sent back to the House of Representatives Thursday because of two minor changes to a section of the bill that has nothing to do with health care.

In fact, until now, many people didn't know that tucked into the health care bill are some of the most sweeping changes in decades in a different area - helping students pay for college.

CBS News correspondent Ben Tracy reports Colin and Corey Fequa are caught in the middle of the fight raging in Congress. They had to drop out of Delaware State after racking up a combined $55,000 in debt for tuition, room and board, and books - in just two years.

"You need some type of degree to go far and get some type of career," Corey Fequa said.

For their single mom, Karen, the college costs were crushing.

"I try to be a good mother," she said. "I felt I failed as a mother."

But now they may get help from the health care bill. The new law includes $36 billion for Pell Grants, free government funds given to 6 million low-income students. The maximum Pell Grant would jump from $5,300 this year to nearly $6,000 by 2017. Without the new law, it would have dropped to $2,150 next year.

"It adds up to $1,600 over four years," said Lauren Asher, president of the Project for Student Debt. "That's a lot of money that people won't have to borrow and will help them pay for college."

SCOTUS Confirms Chapter 13 Can Include Student Loan

On March 23, 2010, the U.S. Supreme Court issued a 9 – 0 opinion in United Student Aid Funds, v. Espinosa (08-1134) in which the Court affirmed the 9th Circuit’s holding that a chapter 13 debtor can obtain a discharge of a student loan by including it in a chapter 13 plan, if the creditor fails to object after notice and opportunity to do so, and the BK court enters an order confirming the chapter 13 plan. In bankruptcy, a student loan is not discharged unless the bankruptcy court makes a determination that excepting the student loan would be an undue hardship on the debtor. Under Bankruptcy Rules, the court is required to make such a determination in an adversary proceeding — a lawsuit within the bankruptcy case. In Espinosa, the debtor did not bring an adversary proceeding. Rather, the debtor put in his plan that only the principal amount of the loan would be paid through the plan, but that accrued interest would be discharged. The student loan lender did receive a copy of the plan, and even filed a Proof of Claim. But, the lender did not object to confirmation.

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