Student Loan Reform: What to Expect
Students now appear likely to get a back-to-school present: loan reform. The Senate Education Committee approved relief measures this week similar to those recently passed by its House counterpart. Both full houses are expected to approve the bills later this summer, with a final version going to President Bush in September, just in time for the new school year. The proposed changes include halving interest rates on federal loans (from 6.8 percent to 3.4 percent), increasing the size of Pell grants for low-income students, and limiting monthly loan payments for students in certain public-service fields, such as teaching. The bills would pay for the measures, valued at around $18 billion over five years, by reducing subsidies to lenders.
Reform of the $85 billion student loan industry has been a top priority for Congress since investigations earlier this year revealed under-the-table arrangements between universities and lenders that sometimes resulted in higher costs for students. The mounting cost of college and rising student indebtedness—the median debt level was $19,300 in the 2003-04 school year for graduates of four-year schools—has led to a groundswell of support for wide-ranging changes. Meanwhile, industry groups warn that the changes may not taste as good as they look. Here is an overview of what to expect.
If passed, would the changes reduce my monthly loan payments?
Under the House College Cost Reduction Act of 2007, students taking out new federal loans (Federal Direct Stafford Loans) would face a maximum interest rate of 3.4 percent, half the current rate, after the change is phased in over five years. That means this year's crop of high school freshmen could save $4,400 over the life of an average $13,800 loan, according to calculations by U.S. Public Interest Research Group.
Students and graduates who already have loans would not see changes in their monthly payments; the legislation would only affect new loans.
I want to become a teacher. Will the changes help me?
Both the House and Senate proposals offer relief to students who want to pursue certain public-service professions, including teaching, starting for those who graduate in 2008. The House bill, which is sponsored by Education Committee Chairman George Miller, would provide tuition assistance of $4,000 per year to students who plan to teach in "high need" high schools. It also would forgive up to $1,000 a year in federal loans for up to five years to graduates in public-service roles such as nurses and public defenders. A recent law school graduate, for example, who takes a job as a public defender could benefit from the program. The Senate bill also would forgive a portion of loans for graduates working in public-service jobs that pay less than $65,000 a year.
The House and Senate bills would protect graduates from spending more than 15 percent of their discretionary income on loans and forgive loans for some borrowers after 20 and 25 years, respectively.
What about grants?
Low- and moderate-income students eligible for Pell grants will receive more money; under the House bill, the maximum Pell grant would be $4,900 in 2008 and $5,200 in 2011. (Today, the maximum Pell grant is $4,050.) The Senate version offers a maximum of $5,400 by 2011.
Why doesn't the loan industry like the proposed changes?
The industry is concerned about the proposed cuts in subsidies paid to lenders, which is how the bills propose financing the increased benefits to students. The House bill would reduce subsidies by a total of $19 billion. Kevin Bruns, executive director of the industry group America's Student Loan Providers, says the proposed cuts in subsidies to lenders are so deep that they would force lenders to reduce the benefits they provide to borrowers. For example, lenders sometimes pay certain fees for students; Bruns says such discounts would probably have to stop. He also says he thinks some lenders would abandon the student loan business because of the reduction in profits, thereby reducing options for students.
The bills also propose a pilot program in which lenders would compete in state auctions to provide the most competitive loan terms, which supporters say would increase competition in the industry. Bruns said that the concept was unworkable and that it would give the government, instead of parents, the ability to select lenders. "The lowest bid would trump service reliability and quality every time," he says.
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