Student Loan Bill | Cutting out the middleman

A stack of college textbooks

College students already use federal student loans to pay for everything from tuition and books to housing. Image from Flickr.

Tucked inside the health care reform bill that congress passed on Sunday was a bill that will reform the student loan system. Focused mainly on how student loans are administered, the student loan bill will create $61 billion in savings over 10 years. Of those savings, $30 billion will be put back into education, while another $10 billion will go to deficit reduction. Banks and financial institutions will no longer act as the money lender on these loans — instead, the Department of Education will administer the loans.

Student loan bill changes administration

The biggest change that the student loan bill will implement is in how the student loan program operates. Currently, Congress sets eligibility rules, interest rates and most of the rules about how student loans are administered. The Department of Education then works with lenders like Sallie Mae and colleges to help students apply for the low rate personal loan.

The lending institution then distributes money to the school. The lending institution receives subsidies from the government for providing this service. The student loan bill will simply cut out government subsidies for lending institutions. Instead, the Department of Education will act as the lending institution. Just by cutting out subsidies, the government will save approximately $6.1 billion a year.

Reinvesting in education through the student loan bill

With the savings of the student loan bill, the Department of Education will be able to reinvest about $30 billion back into education. According to the student loan bill, this money will be used to increase the maximum Pell Grant, which is used to help low-income students pay for college. The bill will also reduce the monthly payments that some students have to make on their loans, which will help make college more affordable for more people.

Criticisms of the student loan bill

Even though this bill saves the government billions of dollars a year and reinvests in education, there are criticisms. The costs of college have been rising at double-digit percentages each year, and the increase in the Pell Grants will not come anywhere close to covering that increase in cost. There are also fears that by cutting out the loan industry, the government will effectively be cutting jobs. However, most estimates say that comparatively few — if any — jobs will be lost, as the government will need to hire personnel to administer the loans. Finally, some worry that interest rates on these unsecured personal loans will begin to rise. However, the student loan bill does not change the fact that Congress sets the rules, eligibility and interest rates for student loans.


Columbia Spectator
Campus Progress
The New York Times

Other recent posts by bryanh