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Student Loan Reform – Government Subsidies for Private Student Loans Eliminated

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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.


Published or updated March 28, 2010.
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{ 7 comments… read them below or add one }

1 MFO

I’ve got mixed feelings about this. Obviously saving $61 billion of 10 years is great, however, after hearing so much about the stimulous, the omnibus, and now the healthcare bill, that number seems rather small, $6.1 billion a year.

I do like that it could potentially boost the Pell Grant program, however small the benefit may be. My question though is will that program actually recieve some of the savings.

Also, essentailly mean that the governemnt now control another chunk of the U.S. economy- student loans?

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2 Evan

I don’t see this as a cost cutting measure. I see this as yet another example of a wasteful federal gov’t getting involved in a private portion of the economy. It will eventually become mandated that the gov’t provide cheap money to anyone and everyone regardless of credit risk because a college education will be deemed a “right”

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3 Ken

Surprise..surprise…something in this that actually involves cutting costs. Time will tell what the results really are.

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4 Abigail

Something else to consider: If there are no more government-backed private loans, the government can potentially get more of its money back.

As it is, private student loans get sent to collections, where people are offered deals like paying just 20% of what’s owed. But with the new system, the government could send collections agencies after people, but folks will have to rehab their loans, rather than simply cut a deal.

It’s a small thing, but let’s hope it means a little extra cash flow for the government. We could use it right now!

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5 Smarter Spend

I don’t like how the government thinks. We are spending hundreds of billions in a war that does no good for our economy or people, but all these proven techniques have to be experimented with. At this point, I don’t know if the student loan reform is for the better… but let’s hope for the best.

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6 Daddy Paul

I think the solution is to reduce the cost of higher education. Education should not cost what it does. If you look at all of the drones we are supporting at colleges you will see what I mean.

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7 Monique

I received my undergrad and grad degree from private schools, but I only graduated with just over 50K in loans. This is nothing compared to the person who paid all their tuition with loans. It sucks that the cost of education is rising so quickly by so much, but we have to understand that we as consumers are in control. No we cannot make a change overnight, but we can overtime. Sitting around and complaining about how much we have to borrow and what the government is going to do about loans is not the answer. We can do research on schools that cost less, take advantage of high school programs that allow students to earn college credit, consider community and junior colleges, avoid name brand schools and do let the football teams success be the deciding factor in where to go to school.

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