House set to vote on student loan reform

WASHINGTON - Millions of college students could get a boost in financial aid from a House bill that would dramatically alter the student loan landscape.The Democrat-controlled House is expected to pass a bill Thursday that would terminate the Federal Family Education Loan Program, in which private lenders provide loans backed by the government.

In its place, the direct lending program, in which students get their loans straight from the government, would become the sole source of government funding for students needing help with college tuition.

President Barack Obama proposed eliminating the program in his 2010 budget blueprint. The Congressional Budget Office estimates doing so would save taxpayers $87 billion over 10 years.

The House bill calls for using $40 billion of that savings to increase Pell Grant awards and invest in early childhood education, community colleges, historically black colleges and universities and other education programs. Private lenders would be hired to administer the loans.

About 6 million students received Pell Grant scholarships in the 2007-2008 school year. The maximum award would increase from the current $5,350 to $5,550 in 2010 and to $6,900 by 2019.

"This represents the single largest investment in federal college aid in history," Rep. George Miller, D-Calif., who chairs the House Education and Labor Committee, said this week.

Education Secretary Arne Duncan said the legislation represents a decision to "stop subsidizing banks and start subsidizing our students."

"This is a big deal," he said, standing amid about two dozen college students.

Critics say the legislation would eliminate choice and competition in favor of a government takeover of the college loan industry. They also say the bill would cost 35,000 jobs in the private lending sector.

"Simply put, we are watching in student loans exactly what ObamaCare's harshest critics have forecast for health care: 'public option' that ultimately destroys all competition," The Wall Street Journal said in an Aug. 20 editorial.

Assuming the House passes the bill, it still must pass in the Senate.

"Even after this week's House vote, the legislative process has a long way to go," said Kevin Bruns, director of America's Student Loan Providers, which represents 80 percent of nonprofit state-based lending organizations.

"There is a lot of concern in the Senate about eliminating good jobs in a recession," Bruns said, "especially when alternative plans are on the table that protect jobs, save taxpayer money and preserve competition in student loans."

Approval of the House bill would mark a milestone for Rep. Tom Petri, a Wisconsin Republican who has pushed direct lending since the early 1980s.

Petri worked with President Bill Clinton in 1993 to pass legislation that made direct lending an alternative to loans under the federal program.

"After years of explaining my approach, and years of defending direct loans from misleading attacks by the private student loan industry, we are an important step closer to settling the debate," Petri said.

Momentum for eliminating the subsidy program began building in recent years amid scandals, including one involving kickbacks among college officials and private lenders. More recently, the recession created stress in the private lending industry as access to capital became limited.

Supporters of the House bill say it would shield student loans from market instability, provide more loan opportunities and make it easier for students to get aid.

"Now we'll be able to do this at absolutely no cost to taxpayers," Miller said, "by undertaking long-overdue student loan reforms."



Source

Federal Student Loan Defaults Ratchet Up

Just as the government's grip on the lending business for higher education tightens, the Department of Education is reporting that defaults on taxpayer-backed student loans surged in 2007 at the very beginning of the credit crisis, suggesting that more losses are baked in.

The national student loan default rate increased to 6.7% in 2007, up from the 2006 rate of 5.2%, the agency reported Monday. "The economic downturn likely had a significant impact on the borrowers captured in these rates," U.S. Secretary of Education Arne Duncan said. "The Department is reaching out to make sure current and prospective student borrowers are aware of the many flexible repayment options designed to assist them with their financial obligations, such as the new Income-Based Repayment Plan."This dated loan performance information doesn't bode well for taxpayers. Despite pullbacks in lending and borrowing by consumers, the amount of government-backed student loans originated as of early August surpassed the full-year total for 2007-2008 school year by 21% at a record $95 billion. (See "Uncle Sam Saves College.")

The default percentage is based on the 225,300 borrowers who defaulted between Oct. 1, 2006, and Sept. 30, 2007, on their first payment out of the 3.3 million who entered repayment during that window. The data has a major delay because the department collects draft rates from schools the spring following the year in question and releases the rate the following September, amounting to a 24-month lag between when the defaults first occur and when they are reported.

The Federal Family Education Loan Program was 7.2%, a 36% increase over the 2006 rate of 5.3%. The 2007 rate for schools participating in the Direct Loan Program was 4.8%, a 2% increase over the 2006 rate of 4.7%.

This isn't the first time that the government loan program was seen defaults ratchet up. In 1990, nearly one in four borrowers defaulted on their federal loans. In 2003, the rate fell to record low of 4.5%.


Source