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Changes Ahead for Federal Student Loans

This article was written by in Education. 11 comments.

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.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 11 comments… read them below or add one }

avatar 1 Anonymous

I know we can help the economy by making it even harder for banks to make money, and more expensive for students to get a loan. That sounds like a brilliant Idea. Obama needs to quit reliving F.D.R’s Biography and get with the program.

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avatar 2 Anonymous

But if it’s going to grants, would that matter? *confused*

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avatar 3 Anonymous

Yes it would matter. Grants are money given to students to pay for their education (the school). Occasionally they cover other items such as room and board, computers, books, and supplies (not sure how this will work with the new plan).

Many students (formerly myself) need to supplement this with additional cash to pay for the above mentioned items. A few hundred for rent, more for food, several hundred per book every quarter / semester, and other supplies (pens, paper, computer, backpack, calculator, etc) can really eat in to what you have. A part time job will not cover all of these unless you are extremely lucky (can work 20 hours per week @ $10 an hour).

Free money (grants) is highly desirable and so will have huge demand (there will not be enough to go around). Loans on the other hand are less desirable and with market forces an equilibrium is reached between what students agree to pay in the future vs. what they think they will make. Banks and other lenders benefits since this future cash flow is valuable to them. Without government subsidies, interest rates will rise up to similar values as car loans or mortgages before finding an equilibrium point.

Thus the net effect will be fewer students going to college, but the ones who do will pay less out of pocket.

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avatar 4 Anonymous

Sounds like a good plan. More free money for students and less loan money. I wonder how it will work out.


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avatar 5 Anonymous

I like the sound of this plan. In the past, interest rates have been so cheap for student loans that most students don’t even think twice about taking one out. With the potential for higher interest rates, it will force students to be more creative in paying for school.

But if the government is going to turn those subsidies into free money in the form of grants, it sounds like a win-win situation.

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avatar 6 Anonymous

The government subsidizes student loans under the *idea* that the lenders will offer lower interest rate private student loans. On paper, it sounds like a great idea.

In reality, it’s just more money in the banks’ pockets, with no real value passed on to the students. When I applied for private student loans through Sallie Mae, Wells Fargo and Bank of America, guess who had the *highest* interest rate? Sallie Mae. Not that Bank of America was much better. I still ended up with an interest rate that was DOUBLE that of my direct student loan.

So IMHO, students will see a bigger impact/better benefits with grants. If you cut out the middle man (banks receiving the subsidies + higher interest rates charged anyhow), think how much more money will be sent directly to the students.

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avatar 7 Anonymous

Being a single mother of a soon to be college freshman, this is going to limit our financial choices. This is my second child that I will put through college, and I know that because of how many hours I work (I am a registered nurse), we do not qualify for most of the grants, and a deferred student loan helped. It appears that this option will now be taken away….apparently another punishment for working so hard.

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avatar 8 Anonymous

WHOA! I’ve worked in the Student Loan business, and trust me, low interest rates are not being passed on to the consumer. You forget that they have a loan origination fee – 1-2%. Then when you consolidate – another 1-2%. You never notice it because they roll it into the cost of your loan. If you were to pay up front, trust me, you would notice.

Call me crazy, but I actually like the idea of giving the subsidies directly to the student (or parent, etc) instead of giving them to the banks assuming they will pass them on. We bailed out banks in the billions lately and it barely made a ripple. Imagine giving that directly to citizens and see what kind of an effect that would have? (For a comedian’s viewpoint – Chris Rock’s “Reperations” skitt would come close.)

And it would insure the money stays “on shore.” There’s no guarantee once you give it to the banks that it gets invested locally. If you give it to an ordinary citizen, you can pretty much guarantee it will stay local.

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avatar 9 Anonymous

I’m confused. There’s no link to any article detailing this information. Are they doing away with the whole Stafford loan program or just the subsidized portion? When i was an undergrad, I could only get some of my Stafford loan money as “subsidized”. A greater portion of that loan was “unsubsidized”. Still a government loan, but the interest began accruing right away. Unfortunately, I wasn’t able to get the super low interest rates when I consolidated that others managed but my 3.85% is still better than most out there now.

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avatar 10 Luke Landes

They’re not doing away with the Stafford loans. The change would be that the government, rather than banks, originates the loans, and savings would theoretically be passed to the borrower (which never happened with the banks). As with any proposal, the details are sketchy until the Congress introduces and debates a bill, which will then be eventually signed into law. You can see some thoughts in the media by searching Google News, but anything you find today will be light on details.

Also, check out the Administration’s official position, also light on details.

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avatar 11 Anonymous

Yay, more gov’t control!

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