Student Aid and Fiscal Act - Law would make government sole provider of student loans

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Houstonian Online
Current Issue: October 13, 2009

Law would make government sole provider of student loans
Meagan Ellsworth - Associate Editor

Issue date: 10/6/09 Section: Campus News
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Media Credit: Krystal Jackson
Cutting out the middle man. Should the Student Aid and Fiscal Act officially pass, it would make the United States government the sole provider of student loans.

The House said yes, the senate is debating, and students who receive Stafford loans have a reason to be concerned.

The Student Aid and Fiscal Act, is making its way through Congress, an act that would require all colleges and universities to use a federal direct loan program for their student loans, eliminating private lenders such as Bank of America and Sallie Mae by as soon July 1.

That means the government would be the one and only provider for student loans.

"At this university, most of the long term loans are Stafford loans, and that's the program that is being discussed for elimination or shall I say replacement. I don't want to scare the students too much," Lisa Tatom, Director of the Financial Aid Department said. "I don't know for sure if it will be a phase out or cold elimination. People are kind of afraid that it will be a cold elimination.

One student shared his thoughts about the elimination.

"I'm here on scholarship, so I don't really benefit from Stafford loans, but I guess it would be a good idea for those who don't really have a lot of money, for the government to take over. Either way you have to pay it back, but it'd be an easier process to go through because Stafford loans takes so much time to get the process through before the money actually gets there," Tyler Jones, SHSU freshman, said.

In the past, before the credit crunch hit, lenders would compete on prices, some would offer lower interest rates and would buy down loan fees based on competition.

"If this legislation passes then that all goes away, there won't be any competition there won't be any choice for students, you get one loan, it's from the federal government. Like Henry ford said, ' you can have any color car you want as long as it's black,' well that's what you're going to get in student loans," Bob Murray, Vice President of Corporate Communications, USA Funds said.

Less choices leaves one student with her own doubts about the elimination of private lenders.

"I don't know how I feel about the government being the sole provider. If it restricts students on finding a good deal on their loans, and if it will affect all private lenders and banks, I don't think it will be too much of a positive thing," Rose Carrillo, SHSU Junior, said.

One concern is the rush to have an entirely new loan program and process by July 1.

"It may be difficult for some schools, because you can't just wait until then to get your work done, you have to give your processes and your communications to your students and parents well before July 1," Murray said. "There are many schools that are very concerned that this change is being made to hastily and is going to cause them some real headaches and could even disrupt student loan services next academic year.

Despite the issues that Murray said students should be concerned about, he also said there are some good points to the legislation.

"There's a $40 billion increase in Pell grant funding, the federal grant program for low income students, so there are some good provisions in it, but there are also some real down-sides to this bill for students as well," Murray said.

The congressional budget office estimates that the bill would save $87 billion over ten years by cutting private lenders out of the picture.

"Student loan borrowers pay interest to the lender. That's what lenders do, they use money they have on hand, they lend it, and make money off of it, it's called interest," Murray said. "In this case instead of that interest going to lenders, it would go to the federal government. That's where the bulk of the savings come from, instead of the borrowers paying the interest to lenders they are going to pay it to the federal government."

Murray said the other difference is that the federal government can borrow money more cheaply than the private lender can in some cases. He also said it appears the federal government would make more money than they currently do under the student loan program where lenders participate.

"Ranked for 2009, even the program in which they participate makes money for the government, but the direct loan program appears to make much more money for the government then the program in which lenders participate," Murray said. "That's where they come up with these supposed $87 billion in savings. Now $7 billion would be administrative, so the net would be $80 billion."

At present the new Stafford loans are fixed interest rate loans. For the last two years, interest rates on subsidized Stafford loans for undergraduates with financial need, has been a lower rate each year, if they are stepping that rate down to 3.4% by the year 2011, but would expire under the law that enacted it in 2012.

Then the rate would become variable and go back up to 6.8 percent, which is what most Stafford borrowers pay.

"It would change each year but the benefit would be the maximum rate could never go higher than 6.8 percent. So yes, some of those loans will go back to a variable rate loan but the maximum cap on them would be lower then it had been before. "

The variable rates wouldn't apply to graduate students, medical students, nor would it apply to unsubsidized loans.

A host of services that lenders and student loans guarantors, such as USA Funds, currently offered in the program in which lenders participate could disappear.

"We do an extra measure of support to students who are having difficulty making their loan payments, so they don't end up into fault. We do financial literacy programs, we provide loan counseling services, college planning and access services, all of those services that are now provided by lenders and guarantors could go away under this legislation," Murray said.

Murray said USA funds supports an alternative model that provides savings for increased student aid, but doesn't inflict some of the "down-sides" of the house bill.

"There's an alternative model out there that also saves tens of billions of dollars a year that could fund most of these student aid enhancements that the Student Aid and Fiscal Responsibility Act does, including the $40 billion in Pell grant increases, but it doesn't eliminate lenders from the program," he said.

USA Funds also supports the funding for services provided by student loan guarantors and other types of nonprofit, and state agency organizations, who provide loan counseling, financial literacy, borrower assistance and repayment.

Although the direct lending will be new for most, for others it's old news.

"Direct lending has been around for several years. A lot of universities already have it, which is a good thing for us because that means all the bugs have already been worked out. Because it was very problematic when it first came into existence," Tatom said.

For more information about the Student Aid and Fiscal Responsibility Act, go to www.house.gov and visit the Committee on Education and Labor page. Concerned students are also encouraged to contact their State Senator about the piece of legislation.