Last week Congress voted to reform the program the federal government uses to allocate funding for student loans. Since 1965, the federal government has offered subsidies to large banks that provide loan programs for needy students. It was never entirely clear where the money from the subsidies provided went, but allegations have been made by many congressional democrats that the subsidies were, as the New York Times suggests, fattening the banks’ bottom line. Conservative supporters of the subsidy program view the reform as another government take over by Barack Obama’s administration.
The reform bill has one specific goal: to remove the middleman (the banks) from the student loan business. Banks will no longer be subsidized by the government and cannot make a profit on student loans. This bill takes banks out of the equation. The movement for student loan reform has been fueled in part by the recession and the economic criticism of large student lenders like Sallie Mae. Excessive increases in tuition rates, as well as inflation, specifically in the cost of higher education, have also played a role in the development of the bill. Now that the reform has passed, students will see several actions takes place. Firast, all subsidized student loans will be facilitated by the government without commercial bank involvement. The projected $61 billion saved from not subsidizing banks will be poured back into the education system over the next ten years. The bill calls for $40 billion to go directly to higher education, $2 billion for job training at community colleges, $2.5 billion for historically black colleges, and an undetermined amount for elementary education. A small portion of the savings will also fund parts of the healthcare overhaul.
Regardless of whether this invasion of the free market is ideologically or politically correct, the Foghorn contends that this reform will have definite positive effects on the USF student body. The largest impact the reform will have is on Pell Grants, a form of financial aid the government offers low-income students. The New York Times and Washington Post report approximately $36 billion dedicated to supporting Pell Grants. Many students at USF are able to afford the cost of tuition at a private, Jesuit institution because of government sponsored financial aid. Every year students fill out their FAFSA, hoping to receive enough money to afford tuition without having to go into serious debt. Without this reform, the Pell Grant program could have been severely reduced, or possibly even dismantled. The current stagflation, specifically in California, has resulted in the price of tuition for higher education drastically increasing and the average household income decreasing. More students are in need of more student aid. The reform bill will give more USF students the opportunity to apply for Pell Grants and increase financial aid.
Pell grants are not the only way that students will benefit from loan reform. Because banks will no longer be allowed to distribute subsidized student loans, students and parents will work directly with their college’s financial aid office. This will cause more work for individual financial aid offices, but will allow students to get individualized help from their respective institution. The bill also reduces interest rates on direct PLUS loans, which are similar to Pell grants and are awarded to parents who demonstrate financial need in sending their child to college. The reduced interest rates will save USF students and parents money and keep them from gathering more debt as they pay off their loans.
Opponents of the bill site the need for market freedom in order to supply students with quality loans. For more than forty years, however, commercial banks have been given free market capability. In that time, banks and lenders have not demonstrated the ability to control market inflation, avoid corruption, or provide a reasonable loan program for students. If higher education is not made more affordable, then the student population will decrease and graduation rates will suffer a serious blow. Although this bill does give the government significantly more control over student loans, it is a necessary measure in saving higher education in the United States.