Dollaz ‘n’ Sense: A primer on Obama’s proposed revamp of student loans
Posted by: Traviss Cassidy in Vox Populi, tags: Barack Obama, Money, Student Loans
Free Money!!!
President Obama’s proposed overhaul of the student-loan industry has ruffled more than a few corporate feathers and elicited the dreaded “S” word from people not named Rush Limbaugh (though I’m sure Rush would oblige if you offered him some Vicodin), so it’s high-time we provided a curt rundown of what the President is talking about. The BS-free version of Obama’s student loan reform program:
Under the current system, students choose among three different types of loans: federal direct loans made by the government, federally guaranteed loans made by banks and other private lenders, and non-guaranteed loans from private lenders. The government currently subsidizes federally guaranteed loans given by private lenders such as Sallie Mae, the largest student lender in the nation, while guaranteeing the amount loaned—effectively cushioning the lender from virtually all risk associated with lending while allowing private lenders to reap a healthy chunk of change in the process.
In short, it’s a pretty sweet deal for lenders that get a piece of the pie (read: Sallie Mae), but abuses and inefficiencies in the student-loan industry have caused many to doubt the efficacy of the current system.
After the jump, what the Prez. is proposing…
President Obama has proposed to replace federally guaranteed loans with loans made directly by the government, erasing private lenders such as Sallie Mae from the equation. The Congressional Budget Office has projected that this policy shift—which would mean that Congress would no longer subsidize or guarantee loans made by private entities—would save $94 billion over the next ten years.
So how will this affect the availability of student loans and grants?
For one, President Obama wants to make making spending on Pell Grants—government grants given to students most in need—mandatory, meaning the amount of grant money available each year will be fixed. Under the current system, this amount fluctuates depending on the budget. He also wishes to increase the maximum yearly grant from $4,731 to $5,550.
On the loan front, President Obama aims to expand the Federal Perkins Loan Program from 1,800 participating institutions to 4,000, meaning more students from more universities will have access to these loans. The administration also wants to increase the amount of money available through the program from $1 billion to $6 billion. Students should be forewarned, however: interest on these loans begins to accrue while the borrower is in college.
These numbers may seem large in aggregate form, but the proposed changes would only increase available grants by a few hundred dollars per student while making loans more readily available. Plus, the proposed benefits wouldn’t take effect until July 1, 2010, and are subject to the approval of a Congress that is currently being bombarded by lobbyists from private lending companies that stand to lose the whole pot in the scheme.
Still, if the proposed reform passes in Congress, many students will find a little extra C.R.E.A.M. in their pockets. And that’s certainly nothing to complain about.
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HOW IS THIS CONNECTED TO AMERICORPS AND AMERICA’S YOUTH DOING MANDATORY VOLUNTEER SERVICE IN EXCHANGE FOR STUDENT LOANS?
I assume you’re talking about the Generations Invigorating Volunteerism and Education (GIVE) Act? From what I gather, many have claimed that the act would make volunteer service mandatory for the youth of America. However, this was never the case. The version that was introduced in the House called for Congress to create a committee to look into factors which deter volunteerism in the United States, and to explore whether it would be a good idea to make volunteer work mandatory for younger citizens. However, it never actually proposed making volunteer work mandatory. The final version, which passed with bipartisan support, contained none of this language about looking into a mandatory volunteer requirement for youth.
It’s true that Americorps volunteers get the equivalent of a Pell grant for each year of service they complete, but…this in no way constitutes “mandatory volunteer service.” You know, you have to apply and get accepted…so I’m not really sure what you’re talking about. I also think that perhaps this response should be in all caps to match the raw, unadulterated typographical power of your post…
You’ve neglected to mention (maybe because you don’t know) the thousands of jobs that have already been lost due to the Congressional attack on the student loan industry, and the thousands more that will be lost if this proposal becomes law. All but a tiny handful of these jobs have been held by middle income workers, not corporate big-shots. Has the government ever performed any function better than private industry? I can’t think of any examples.
Rick,
I thought it was understood that lots of people would lose their jobs if, say, Sallie Mae got pushed out by a new policy. (I mentioned that private lenders of federally guaranteed loans “stand to lose the whole pot in the scheme.”) The reason I didn’t delve more into that is because the post is directed at a particular audience–college students–which mostly cares about how the change will affect their ability to get loans.
Also, I’m not trying to make a judgment call on whether government or private enterprise is better equipped for this sort of thing; after all, the current system in which private lenders of federally guaranteed loans can reap the profits without worrying about the risks of normal lending can hardly be characterized as free market, so it was never really a question of laissez-faire vs. government control in the first place.
I am 53. Getting a degree didn’t help. I applied for a job washing windows this morning. Sallie Mae called and I told the woman to give me a second to set up my telephone recording equipment. She said she did not give me permission to record the call. I told her the State Attorney general’s office said that’s what I need to do. She then said well, the calls will just continue. (Click) They call about 10 to 15 times a day. I have been trying like hell to get any kind of job. If I get one, I will start to pay my student loan. I am living off the goodness of others for now. But it just seems that no one wants to higher us middle-aged men that have kick-ass resumes.
For me getting educated in college really gave me the edge. My whole life after college, I’ve never been rejected for a job I applied and I believe I should thank my college credentials for that. I think Obama really wants people to succeed and getting college education is one way. I’m not saying it’s the only way, though.
What about those schools that do not accept Federal funds (e.g., Hillsdale) for reasons of principle? This program means that fewer (far fewer, I think) students will be able to apply/attend this and other schools of similar mind. Is that right, fair or just? It seems choices are being ruled-out for the student. In short, socialism is bad!
One more thought — the Federal student loan guarantee should be extended to all private issuers to foster a competitive market. Sallie May is a monopoly in this business, and of couse they will take advantage of that unique situation. A little competition would bring the rates down to a level that would more accurately reflect the cost of capital and the risk premium (the latter of which is very close to zero).