Student Loan Reform Would Cost Lenders
Legislation passed by the House of Representatives this week aims to reduce the interest rate on need-based student loans from 6.8 percent to 3.4 percent by 2012, which would save college students thousands of dollars. But just how much would the changes cost taxpayers?
Actually, they would save taxpayers money, according to a Congressional Budget Office analysis of the House bill. The CBO estimates that the legislation would reduce government spending by $65 million between 2007 and 2012, assuming it went into effect by July 1. While the interest rate reductions would cost plenty, they would be more than offset by other provisions of the bill, the CBO says, including reduced government payments to companies that make the student loans and increased fees from the lenders.
The legislation applies only to subsidized Stafford loans awarded to students on the basis of financial need. Undergraduates took out $16.3 billion worth of those loans in the 2004-05 school year, the most recent figures available.
The loans are made through two programs: the Federal Direct Loan Program, in which students borrow directly from the government, and the Federal Family Education Loan Program (FFELP), in which students take out federally guaranteed loans from private lenders. FFELP accounts for the large majority of the loans.
The CBO estimates that the proposed interest rate cuts would cost taxpayers $7.1 billion through 2012. In the direct loan program, if the rates were cut, students would pay the government less and thus increase federal spending. In FFELP, the interest rate reductions would trigger higher government payments to lenders or reduce the rebate lenders pay to the government–both increasing federal outlays.
But those costs would be more than recouped in the new legislation by charging lenders higher fees, reducing payments to lenders, and limiting the insurance the government pays out to lenders if student borrowers default on their loans. Those changes could all erode the lenders' profits, and the companies are strongly opposing the student loan reform, which is expected to be debated by the Senate next week.
"The bill's additional cuts of $7 billion come on top of the $18 billion in program cuts made less than a year ago by the Deficit Reduction Act," complains Kevin Bruns, executive director of America's Student Loan Providers, which represents 86 private lenders that provide FFELP loans. "Cuts of this magnitude jeopardize features of the program that serves 80 percent of our students, parents, and schools."