Subscribe to this BlogObama Plan Aims to Streamline College Loan Shopping
Right now about 80% of the federal Stafford (student) and PLUS (parent) loans for college are doled out through third-party lenders via the FFELP program, with the Federal Direct Loan Program handling just 20% or so of loan volume.
The FFELP program is now on the endangered species list.
President Obama’s new budget proposes for 100% of college loan shopping to come in-house. Under the administration proposal third-party FFELP lenders would be cut out of the mix and all Stafford and PLUS loans would be originated through Uncle Sam’s Federal Direct Loan Program.
The Obama bean-counters estimate that moving the entire program in-house would save about $4 billion a year, and $47.5 billion in the first 10 years. The bulk of the savings comes from the elimination of federal subsidies to FFELP lenders.
Mark Kantrowitz, publisher of the finaid.org website says this move would be “a death blow to the student lending industry.” If so, it’s just the final punch.
Let’s remember that this is the same student loan industry that was rocked in 2007 when New York attorney general Andrew Cuomo revealed kick-back schemes where lenders offered financial aid offices incentives for steering potential clients in their direction. That scandal no doubt played a role in Congress pushing through a big college lending reform bill later that year that severely cut back federal subsidies paid to the third-party lenders through FFELP.
Certainly not having to shop around various FFELP lenders for a Stafford or PLUS will be a boost to students and parents, but it will remain to be seen if the actual cost to borrowers will be lower (taxpayers are another matter.) Many FFELP lenders offered small rate-reductions and discounts to qualified borrowers, under the Federal Direct Loan Program those discounts may not be available.
Stay tuned as this budget item is sure to get plenty of air-time in Capitol Hill debates. That said, there’s still no official plan for fixing the really big headache in the college loan process: the insanely difficult FAFSA form that is required to obtain financial aid.
– Carla Fried
Private loan are a rip off. This could not have happened any sooner. I just hope that they raise the limit on the amount of Stafford loans you can take out per year that way it actually reflects the cost of attending college. 6.8% is the best thing there is and it is decreasing for undergraduate loans for the next few years.
I expect savings will emerge–not from elimination of subsidies but, once the federal government is the only lender, it will pressure schools to control the rate of tuition increases.
Let the private industry compete huh? You mean like Sallie Mae, where the AVERAGE private student loan is at 10% interest. They dish out loans for 30,000 at 14% interest. They have been given a ticket to do anything they want. That is the LAST thing we need. What bank or company is going to want to take on 50-60k in debt on someone with no collateral other than the hopes of getting an education.
I have over 90k in student loan debt. I received no financial aid from my school. I applied for everything, turned out everytime. I had to take out private loans and the loans were 10, 12, 14%. I accrued 25k in INTEREST after my 4 years in college. Luckily, I am an accountant, have a recession proof job and make good money so I can actually afford to pay it. Although since I do pay $7000 a year in INTEREST to Sallie Mae, I cant spend money on stimulating the economy because I just make it so the CEO of Sallie Mae can shop for professional sports teams.
The govt needs to provide LOW INTEREST student loans, I don't care how they do it. My life and thousands others would be much better and we would have more money to spend on houses, cars and other things if we weren't paying thousands a year for student loan interest. This country has been on a downward spiral for the last 10 years. Lots of things need to change, and college tuition costs and student loan interest are two big ones.
The "insanely difficult" FAFSA??? I don't think this author of this article used financial aid to get her degree. Not only is the FAFSA simplier than a 1040EZ tax return, anyone hoping to manage college courses surely ought to be able to fill one out. It's free, online, and only takes about 20 minutes.
Moreover, with tuition outpacing inflation by three times (10% per year on avg.), there are far more grave issues in the college loan process than filling out the paperwork.
My school switched from FFELP to the Federal Direct Loan Program. Now, there is no competition for our loans, and we have to pay 6.8% on our loans rather than the 5.8% we used to be able to get when lenders competed. Additionally, we have to pay a distribution fee. If the government is going to take over these loans, PLEASE consider lowering the interest rates. Why are students (the future of America) having to pay 6.8% on federal education loans when every other loan in America is cheaper? Shouldn't there be an incentive to get an education?
Agreed with Ross from Brooklyn: it's about time!
These FFELP "lenders" do nothing to add value to the student loan equation. FFELP "brokers" might be a more appropriate term. My lender (Commerce Bank) did nothing for me other than disburse the loan, minus a two percent origination fee and a few other fees, and then sell the loan to MOHELA, Missouri's non-profit student loan entity.
Commerce did nothing to add value to the transaction, but they charged hefty fees for doing essentially nothing useful. It's time for this gravy train to end.
Isn't the move to Direct Loans creating a monopoly? The more players there are – the more the student benefits from competing lenders.
Hard to imagine the federal government doing this job for less money than a private company. Maybe reducing loans is the right strategy. Might force colleges to adjust cost structures to reflect inflation.
From a college student's point of view, it's about time someone takes charge and gets this mess out of control.
This move should scare everyone. As bad as the government has been in regulating banks, they're far far worse at regulating themselves. Moving a private industry into the government has never worked and will fail here – and students will be the ones who suffer.
Let private industry compete, make a reasonable return, and make sure they play honestly – that's the government role.
Banks will still be able to compete in the student loan business if they so choose—they just won't have the government assume the risk for them any longer. If the government can save money by not having to subsidize private lenders, then by all means thats what the government should do.