President Obama has proposed a number of changes that will affect how college students qualify for and receive loans to finance higher education. The plan calls for significant changes and like many other changes in the government over the past month, it is causing some controversy.
Currently, the government subsidizes student loans offered by banks and other private companies, like Sallie Mae, the biggest college loan company. Low interest rates are offered to students, and in turn, the federal government pays lenders to take on this debt. These subsidies are costly, and eliminating them in 2010 would save $4 billion each year according to Education Secretary Arnie Duncan.
The money saved will be used to increase the level of money distributed to students as grants, making college more affordable to more people. Lenders are concerned about this plan. Sallie Mae stands to lose seventy-five percent of its loan origination business to the government, and banks will lose the ability to offer low-interest government-backed student loans. Without subsidies, it’s unlikely that banks will be able or willing to offer competitive products, and that could reduce choices for students shopping for loans.
Updated October 16, 2016 and originally published March 2, 2009.