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.