Wednesday, March 31
Posted 3 p.m. Eastern
There seems to be some controversy swirling around the new changes to the student loan business. Frankly, I don't understand what all the fuss is about.
A bifurcated systemA little background is in order.
Colleges and universities have been offering federal loans through one of two channels: either the Federal Direct Student Loan Program, run by the U.S. Department of Education, or through the Federal Family Education Loan program, or FFELP. The latter program, begun in the 1960s, involves private lenders who are subsidized by the government to provide student loans. The schools determine which program to adopt, not the students. The interest rates and repayment terms for federal Stafford loans are identical, regardless of the program.
The new law eliminates FFELP, effective July. Lenders in that program will no longer be able to originate loans, but they will be able to service them.
The move saves the government more than $60 billion over 10 years and expands Pell grants for low-income students, as described in Bankrate's story, "Student lending gets an overhaul, too."
Who gets hurt? Banks and other lenders such as Sallie Mae and Nelnet that have profited enormously for years by offering risk-free loans to students backed by the government.
A few years ago, you may remember, some private lenders got into trouble for providing colleges and financial aid administrators lavish inducements -- such as free trips to exotic places -- so the lenders' names might appear on the "preferred lenders lists" at schools. Students would pick these lenders, thinking they were preferred for good reason.
More troubling is that these lenders used their position to peddle expensive private loans to a ready market, with terms that brought them a whole lot of money with no risk -- at the expense of unwitting students.
Cause for joy or despair?I'm not shedding a single tear about the changes to the system. But others view it as a loss. "It's one more plank in the cradle-to-grave entitlement state," The Wall Street Journal opines (or whines) in a recent editorial.
On the other hand, some outfits see it as reason to celebrate. "The law is a major victory for students and taxpayers, and we strongly supported its passage," says Edie Irons, communications director, Project on Student Debt.
The change "will clarify the distinction between private, nonfederal student loans and federal loans. When Sallie Mae, for example, offers both private and federal loans, students are not always clear about what they are getting," she adds.
Many students don't know about the financial aid process and the importance of filling out a FAFSA form early in the year to get access to federal Stafford loans with much better loan terms. Irons explains how private loans differ from Stafford loans:
"Private loans are more like credit cards than financial aid. They have variable interest rates that can rise with little or no warning, and almost none of the consumer protections that federal loans have, such as loan forgiveness programs, income-based repayment options, and deferment or forbearance. These loans are almost impossible to cancel in bankruptcy, and the debts remain even if the student dies or becomes permanently disabled. Many students don’t understand these differences until they enter repayment, and they have almost no recourse if they can't afford the payments."
Bankrate's story, "What to do when you can't pay student loan," explains the multiple repayment options of Stafford loans.
Will private loans be tougher to get as a result of the elimination of FFELP? Yes, that's a likely outcome of the change. The Wall Street Journal reports that Sallie Mae's private loan business already fell 50 percent last year due to recent expansions in the federal Stafford and PLUS programs.
But for most college students, lack of access to private loans with onerous terms will be a blessing.
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