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
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