Student loans now back in government's hands

Tacked on to the health care reform bill at the last minute was a bill to overhaul the student loan program and eliminate a $60 billion program for support of private student loans. If the reconciliation bill is passed by the Senate, all future federal student lending will be done by the federal government, with private lenders servicing those accounts. Changes will start July 1 if the Senate passes the bill and it's signed into law.

The non-partisan Congressional Budget Office expects this change to result in $61 billion in savings by eliminating private lenders, who serve as the middlemen. These private lenders were raking in money for making these loans that were being guaranteed not by the banks, but by the government.

House Education Committee Chairman George Miller (D-Calif.) blasted Sallie Mae for its scare tactics about this change. He said in a statement, "Sallie Mae has a history of using scare tactics to hold on to their excessive taxpayer subsidies, bloated CEO salaries and perks, and well paid cadre of Washington lobbyists. Judging by their statements today, it is clear that Sallie Mae will continue to do or say anything in a last-ditch effort to save their sweetheart deal – billions of dollars that we think would be better spent directly helping students pay for college."

Miller went on to say that "Sallie Mae executives used the threat of job losses to pressure their employees to lobby against these reforms, while privately admitting their jobs were not in danger. It is shameful that company executives are playing politics with an issue as sensitive as job losses and trying to pit their own workers against middle class families seeking access to college." And he added, "In fact, Sallie Mae recently brought 2,000 jobs they had shipped overseas back to America to compete for and win their current Direct Loan servicing contract. They know that Direct Loans, unlike loans originated by banks, can only be serviced by U.S. workers – and will help keep jobs in local communities." You can find more information on the student loan programs at the committee's website.

I called Sallie Mae for comment but didn't receive a call back. I did find this comment from Martha Holler, spokesperson for Sallie Mae: "The student loan provisions buried in the health care legislation intentionally eliminate private sector jobs at a time we can least afford to lose them. On behalf of the thousands of student loan originators soon to lose their jobs to a new government monopoly, we are profoundly disappointed."

Campus Progress reports that the private student loan industry spent more than $62 million to try to stop changes in student lending since 1999. The industry lost a lot of its credibility during the 2007 scandal exposed by New York Attorney General Andrew Cuomo when colleges were exposed for offering sweetheart deals to lenders.

More than half of the $61 billion savings, about $36 billion, will go to providing more Pell grants to students. Other savings will be used to pay down debt. If this bill hadn't passed, student loans would have been cut from $5,550 this year to $2,150, and about 500,000 students were expected to lose their Pell loans.

Anya Kamenetz, author of DIY U: Edupunks, Edupreneurs and the Coming Transformation of Higher Education,
a book about the Federal Family Education Loan Program, wrote in a recent column at the Huffington Post, "This reform will also help tame the financial industry's influence in Washington. Student lenders in the past decade grew into a powerful lobby. They forced changes to bankruptcy law in 1998 and 2005 that made it almost impossible for a borrower to escape from federal student-loan debt and private student-loan debt, respectively. Thousands of borrowers are living nightmare lives because of this inflexible law." She has called for changes in the bankruptcy law.

So what are the key changes that will help you as a student?
  • As a student, you'll still do the same thing to get a student loan -- apply through the financial aid office at your school or university. Aid officers will deal with the differences in processing those loans.
  • Rather than see a drop in your Pell loan, you'll see the maximum for a Pell loan rise from $5,550 this year to $5,975 in 2017.
  • Your loan will still be serviced by a private lender, but they'll only win their servicing contract if they maintain acceptable levels of customer service.
  • Student loans will no longer be "securitized" and sold to another bank. The government will hold your loan through the payoff period.
  • If you take a loan after this law takes effect, your loan payment will be capped up to 10% of discretionary income for 20 years. Anything you don't pay within the 20-year period will be forgiven. Prior to this change, the cap was 15% of discretionary income for 25 years. People who took loans before this time will still have to repay under the old rules.

The new law will not impact private student loans in any way.

One word of advice: Be sure you always apply for student loan money through your school's financial aid office first. Federal student loans are capped at 6.8%. Private student loans usually have higher interest rates.

Lita Epstein has written more than 25 books including Surviving a Layoff: A Week-by-Week Guide to Getting Your Life Back Together and The Complete idiot's Guide to Improving Your Credit Score.
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