Government Looking to Control Student Loans

Posted by College Spot in College Finance

The Student Aid and Fiscal Responsibility Act was passed by the House of Representatives a few weeks ago and is now being debated in the Senate. The main purpose of the bill is to hand control of the Federal Student Loan Program entirely over to the Department of Education. It is expected to pass the Senate and be signed into law by President Obama.

The idea is that by removing private lenders from the equation the government would save billions of dollars because they would no longer have to pay subsidies to the lenders to encourage them to lend under the Federal Student Loan Program, which offers college loans at a low interest rate. What is not being said is that the subsidies paid to private lenders is determined by an equation that takes into account current Commercial Paper rates (the rates at which lenders borrower money at) and the interest rates being charged to students. If the equation comes up positive, the Education Department will pay a subsidy to the lenders to encourage them to lend money at a lower interest rate than the interest rates at which they are borrowing money. However, since Commercial Paper rates have been extremely low for over a year, the equation has been coming up negative. This means the private lenders are actually paying money to the government and have been for over a year. Along with this quarterly payment to the government, private lenders must also pay a 1% origination fee to the government on every student loan they make. There is also a fee paid monthly based on the principal balance of all consolidation loans that are held by a lender at the end of each month. By removing private lenders from the equation, the government is giving up a lot of future income.

The other thing not being mentioned is that the government borrows money at extremely low interest rates, yet they will continue to offer student loans at the same current rates. This is crazy, right? How can they eliminate the “expensive” private lenders (which actually pay money to the government) and not lower interest rates and raise loan limits to actually keep pace with the ever increasing tuition costs?

So what does all this mean for students? Since the interest rates and terms are the same whether you borrow from the government or from a private lender participating in the federal program, all the students are giving up is choice. With no competition for your business, chances are very good that customer service levels will plummet. The government has no reason to offer the same kind of borrower benefits that have been offered by private lenders (such as interest rate reductions for on-time payments, etc.) so expect that to be a thing of the past. You will not be able to borrower more money and your interest rates will not drop even though the government borrows money at much lower rate than private lenders. You will not be able to borrower more money even though tuition increases every year, so you will still need to use student credit cards and private student loans to cover your costs of attending school.

By enacting the Student Aid and Fiscal Responsibility Act, the government is taking away a student’s freedom of choice, turning away money from private lenders, and saving money without lowering interest rates and increasing loan limits. The enemy here is not the private lending system (private lenders offer the same loans the government does), but the price of attending college. If college was affordable, there would be no need for students to rack up debt in order to get the degree they desperately need in an ultra-competitive job market. The government makes changes to the Federal Student Loan Program and grants once every five years or so, colleges and universities raise tuition at least once a year, sometimes once a semester. The loan program cannot keep up and is perpetually outdated. Eliminating competition, which will give students no choice of lender and poor customer service, is not the answer. The only solution is to regulate tuition costs and make college affordable for everyone.