The new health care reforms overshadowed the changes to the student loan industry that passed in the same bill as the health care changes. While the student loan section of the bill isn’t quite as far reaching as the health care reform, it is still important and will affect thousands of students, parents, and jobs.
No more government subsidized private student loans
Beginning in July, the federal government will assume the responsibility of issuing all government backed student loans, such as the Stafford Loan and other loans. This bill removes the $61 billion student loan subsidy program that subsidizes private student loans and replaces it with a federally run student loan program. Currently, federally backed student loans are issued by private lenders and subsidized by the US government.
Though all federally backed loans will soon be made by the government instead of by private lenders, there are some banks that retain contracts to service the loans on behalf of the government.
What does this mean?
The biggest changes will be to the lending industry, which has received millions of dollars in subsidies and kickbacks over the years. This will undoubtedly cost some jobs, though how many is up in the air.
On the government side it means a savings of $61 billion dollars over the next 10 years, which will be used to increase student loans, grants, and other higher education programs. In the short term, my guess is that there will be a shortfall of workers to process the loans. Just look at some of the recent problems the government has had with the G Bill as an example.
$61 Billion in government savings means more money for student loans
The government claims that ending these subsidies will result in a savings of $61B over the next 10 years, $36 of which will go toward new Pell Grants and other need based scholarships, and $10B will go toward reducing the federal deficit. The remaining amounts will go to various projects and programs, including many higher education programs.
Pell Grants will increase – but will it make a difference?
The Federal Pell Grant Program provides need-based grants to low-income undergraduate students. Pell grants are currently set at $5,500 per year, and will increase to $5,900 by July 2017. In terms of real dollars, the increase probably won’t be very much considering the average rate of tuition inflation has exceeded 5% in all but one of the last 40 years.
Put another way, the Pell grant covered 2/3 of the average college tuition when it was launched in 1973, but now covers roughly 1/3 of college tuition.
But even this modest increase is substantial considering the number of qualified applicants has skyrocketed in recent years and the Pell Grant system was actually running out of money. The changes to the student loan industry may actually save a program that was facing serious budgetary shortfalls.