FAP620: Just how bad will new congressional legislation on student loans be?

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FAP620: Just how bad will new congressional legislation on student loans be?

6 September 2007 1 views No Comment

FAP620: Just how bad will new congressional legislation on student loans be?

Student Financial Aid News
+ Chronicle: Congress, fresh from a monthlong recess, wasted no time in getting down to business on Wednesday, offering a compromise bill that would slash subsidies to lenders in the government’s guaranteed-student-loan program and use the savings to reduce the federal deficit and increase student aid.
+ The bill, which both chambers are poised to approve later this week, would cut government subsidies to for-profit lenders by a little over half a percentage point while halving the interest rate on federal student loans and raising the maximum Pell Grant to $5,400 over five years. It would also test the controversial concept of using an auction to set lender subsidies.
+ In crafting a compromise bill, the Senate capitulated to the House on reducing the interest that student-loan borrowers pay, while the House yielded to the Senate on setting different subsidy-rate cuts — with one modification: The bill would cut subsidies for for-profit lenders by 55 basis points, and for nonprofit lenders by 40 basis points.
+ House Republicans have also voiced concerns about the bill’s subsidy cuts, which come on top of $18-billion in cuts contained in a 2005 deficit reduction measure. At Wednesday’s meeting, Rep. Howard P. (Buck) McKeon of California, the education committee’s senior Republican, warned that the new round of cuts could upset the balance between the guaranteed-loan program and the direct-loan program, and ultimately harm students. The direct-lending program provides loans directly to students through their colleges, bypassing the banks and guarantee agencies that make up the guaranteed-loan program.
+ A fantastic, detailed analysis by Mark Kantrowitz of FinAid.org
+ Short version: student loan profitability is currently 72 basis points, or 7/10 of a cent on every dollar, which doesn’t sound like much until you multiply it by $85 billion – $612M
+ The proposed cuts will be 65 – 71 basis points, or up to 98% of profitability
+ What will be the unintended consequences? A few predictions:
+ There are no legislative changes to late fees or collections – which means that profits will need to be made there. Expect some lenders to really crank up the heat on late fees and defaulted loans, socking it to borrowers.
+ There are no legislative changes to bankruptcy laws, so for a few really aggressive lenders, the shortest path to profitability will be to get as many borrowers to make late payments or go into default, and then crank up the heat
+ A chunk of the current profitability for federal student loans goes to borrower benefits, like 0.25% off for automatic checking, and for student loan consolidation, 1% off after 36 on time payments
+ Expect all those borrower benefits to go away
+ There are no legislative changes to private student loans, so lenders will likely promote those as the best source of financing, even though rates tend to be higher
+ The Student Loan Network has no major changes right now to our federal or private student loan options, except to say that it’s probably a good time to finish up any loan paperwork you might have with us.
+ Stafford federal student loans
+ Parent PLUS loans
+ Student Loan Consolidation
+ Private Student Loans

Scholarship Update
+ Dale E. Fridell Memorial Scholarships
+ $1,000 quarterly
+ The 2007-08 Dale E. Fridell Memorial Scholarship is open to anyone currently attending or aspiring to attend a university, college, trade school, technical institute, vocational training or other post-secondary education program in the 2007-08 academic year. In addition, eligible students may not have already been receiving or awarded a full-tuition scholarship or waiver from another source. International students are welcome to apply.
+ Details at our free college scholarship search site

Free Stuff Thursday
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+ Geek moment: Platypus