Federal student loan move ends taxpayer gravy train for big banks

a classic college campus scene on a sunny day

Federal student loans are issued directly by the Department of Education now, eliminating banks and their lucrative taxpayer subsidies from the equation. Flickr photo.

Getting government loans for college changed radically on July 1. All federally guaranteed student loans are now issued directly through the Department of Education. The change was part of the health care reform bill passed in March that had bank lobbyists kicking and screaming. The government has removed banks as the middleman for federally guaranteed student loans, and ended the billions of taxpayer dollars in subsidies paid to banks for pushing paper on those loans

Federal student loan shift saves taxpayers billions

The end of student loan subsidies for big banks will create $68 billion in savings over the next 10 years, according to government estimates. As of July 1, all colleges and universities participating in federal student loan programs will be required to offer all new loans through the Federal Direct Loan Program (FDLP). The government claims the FDLP is a more reliable lender for students and more cost-effective for taxpayers.

Federal student loan changes

All new government loans for college are now issued directly through the Department of Education’s Direct Loan program. USA Today reports that the FDLP eliminates the Federal Family Education Loan Program (FFELP), which had allowed banks and other commercial lenders to offer federally guaranteed loans. Affected loans include subsidized and unsubsidized Stafford Loans for undergraduate and graduate students, as well as PLUS (Parent Loan for Undergraduate Students) for parents and PLUS loans for graduate and professional degree students. Changes to these loans under the new program include:

All PLUS loans now have lower interest rates than they did under FFELP (7.9 percent vs. 8.5 percent).
Origination fees for Direct Stafford loans dropped to 1 percent from 1.5 percent.
Rates for subsidized Stafford loans, which are available to borrowers who demonstrate economic need, fell to 4.5 percent from 5.6 percent.

Bank profits moved into scholarships

Most of the savings reaped by eliminating commercial banks from government loans for college will be applied toward the Federal Pell Grant program. Pell Grants are scholarships given to students from lower-income families that don’t have to be paid back. Native Times reports that beginning this fall the maximum Pell Grant amount increases by $200 to $5,550, where it will remain until 2013-2014. In addition, from the 2013-2014 through 2017-2018 academic years, the amount will be indexed for inflation, maxing out at $5,975.

Students must get organized now

This year students with a federally guaranteed student loan must file electronic forms through the federal government’s secure site for the new program at www.studentloans.gov. Kenosha News reports that The change is putting pressure on colleges and universities in both responsibility and the volume of students that must be processed. Financial aid directors are advising students and/or their parents to contact their college’s student financial aid office with questions sooner, rather than later.

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