New SAFRA student loan plan saves taxpayers, students money

New alternative to financing collegeMy daughter starts college in the fall. I don't mind prefacing here that I'm only 38 and it seems like I just finished college myself like, you know, yesterday. So the fact that my wife and I started a family so early has meant that we're behind the curve in terms of saving for college and staring down the barrel of around $20,000 a year in tuition and expenses. Consequently, we're going to have to rely upon some loans in order to augment our ability to pay the giant stack of bills that are, day by day, growing larger.

And while President Obama's plan for student loan reform, the Student Aid and Fiscal Responsibility Act (SAFRA), won't immediately benefit us personally, there's certainly hope for millions of Americans who are desperate for help with the ever- increasing cost of higher education.

Just today, it was announced that the president's student loan legislation would move forward concurrently with forthcoming votes on health care reform slated for the next several (or more) days.

But specifically, the plan would free up $60 billion in savings over the next 10 years in the student loan system -- $22 billion of which would then be redirected into Pell Grants for lower-income Americans. From there, the maximum award for a student qualifying for a Pell Grant would increase by nearly $500 per academic year.

How would this happen?

It's a plan as simple as the cheesiest local television commercial: The president will cut out the middle man and pass the savings along to you. By "you," he means the federal budget deficit and low-income students. Put another way, the plan would eliminate private for-profit participation in the process and therefore save billions of taxpayer dollars that would normally subsidize banks and other lending institutions.

And why not? Established in 1965, the Federal Family Education Loan program is a huge waste of money and gigantic pile of free cash for private lenders. Not only are students and families on the hook to repay the loans, but taxpayers finance the loans while also guaranteeing the loans. In other words, we're all paying for subsidies to banks to lend money to students, but then if a student defaults on the loan, taxpayer money is reimbursing the banks for 97% of the loss. It's an enormous government handout to for-profit lending institutions.

A proactive bailout, as it were. Corporate welfare.

To put it mildly, the current system is a ridiculous way to finance higher education in America. All of the risk is on the American taxpayer while banks do nothing but turn a profit with only minimal skin in the game. Imagine being able to loan-shark billions in cash, and if you happen to stumble into lending to a deadbeat, someone else will come along and reimburse you for the losses. It's all upside.

But considering the amount of money banks spend on lobbying members of Congress to create and preserve these sorts of programs, it's no wonder. It's the education equivalent of the Defense Department. Piles of cash, courtesy of friendly members of Congress, paid out to profiteers who bear near-zero risk, while the American taxpayer involuntarily dumps unlimited wads of cash into the sweaty hands of private banks. The root of the problem, as with most inefficiencies and corporate bailouts by the government, is politics and the money associated with it.

The Republicans, on one hand, don't want anything do with SAFRA. Naturally. But the goals of the bill are precisely what the tea party and large chunks of the Republican base are all about, no? Eliminating wasteful government spending, ending taxpayer bailouts, fiscal responsibility, deficit and debt reduction.

It seems to me as though Republicans ought to be lining up to help cut the deficit by $10 billion over the next ten years via a bill that simplifies how the government does business and more wisely spends taxpayer dollars. Furthermore, private institutions will still be involved to service the loans and to process borrower applications. So it's not entirely, as the saying goes, a "government takeover." The government is already spending the money, so why not spend the money more wisely?

But just as with health care reform (another Obama program that cuts the deficit -- in this case by $1.4 trillion over 20 years), SAFRA's most powerful enemies are a handful of Democrats who strongly oppose the elimination of the middle man in the deal.

Senators Tom Carper, Bill Nelson, Ben Nelson, Blanche Lincoln, Jim Webb and Mark Warner are all opposed to bill. And it doesn't take much digging to discover why. Senators Webb and Warner are from Virginia, where Sallie Mae is based. Sallie Mae, of course, is the nation's largest private student lending institution -- a major recipient of government cash, and a carrier of minimal risk in the lending process. Tom Carper hails from the nation's credit capital, Delaware. Meanwhile, another significant player in the student lending game is NelNet, which is based in Nebraska -- the home state of Senator Ben Nelson (NelNet, by the way, is the fourth largest political contributor among all lending and credit institutions).

During the 2006 election cycle, lending/finance companies spent $6,970,468 on campaign contributions with a party split of 42% to Democrats and 57% to Republicans. When they ran for re-election in 2006, Bill and Ben Nelson, along with Tom Carper, were among the top 20 recipients of contributions from lending/credit institutions. It goes without saying that it's in the best interest of certain members of Congress to protect the free flow of cash into and out of banks.

If passed and signed by the president, SAFRA would go into effect almost immediately: July 1, to be exact. So it appears as though my wife and I, along with our daughter, will be dealing with student loans directly from the government rather than having it passed through the profit funnel. So, good.

Though I imagine the transition will be loaded with hassles. Anyone who's ever had a loan transferred from one bank to another can attest to the insanity of a move like this. (I once had a car loan with a bank that happened to merge with another bank. Six months after the deal closed, there were still two account numbers associated with the loan and no one knew which one to use.)

All told, a more efficient student loan system is one less thing for my family to worry about, though my list of things to worry about over the next four years as a college dad is lengthy and growing by the second. However, I'm lucky enough to have a relatively decent middle-class income. The men and women entering college with lower incomes than mine will surely have an easier go of it from now on.
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