Big Changes Coming to Student Loans

Cutting out middlemen raises cash for bigger grants, easier loan paybacks.

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Will this reform really cause the loss of up to 31,000 jobs, as its opponents (mostly private lenders) claim?

No. This is just a shift in who makes the loans. Since, if anything, the demand for federal student loans is likely to increase, there will still be plenty of need for workers to process and handle the loans. The federal government is already arranging to contract with many of the existing loan companies to service the future loans. The only significant layoffs are likely to be among the salespeople who lobbied colleges to choose a private bank as a "preferred lender." As painful as that will be for the individuals, that's a savings for students because it means there is no more incentive for the kind of kickback arrangements that led to recent scandals, notes Jason Delisle, director of the Federal Education Budget Project for the New America Foundation. Besides, if the federal government can make more loans with fewer people, that's an improvement in efficiency that saves taxpayers money, he adds. Mark Zandi, chief economist for Moody's Analytics, says, "There should be little job impact from this legislation, and any job losses that do occur will be the result of improved productivity."

Is this a federal "takeover" of the student loan program?

Only a little. Until now, the federal government guaranteed the private lenders that made Stafford and PLUS loans that it would repay 97 cents on the dollar for loans that go into default. Now the government will make all the loans, thus taking on the last 3 percent of the risk, and keep the billions of dollars it used to pay to private companies for making the loans. The Congressional Budget Office estimates that's a good deal for taxpayers, with the net gain to the Treasury totaling more than $60 billion over the next 10 years. Private lenders and banks will no longer get paid by the federal government to make the federally subsidized and guaranteed student loans, but they will still be free to raise private capital from investors and make private loans.