Changing the Federal Student Loan Program: What President Obama Proposes
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March 2009 — Major changes to the federal student loan program are under discussion in Congress, as part of the fierce debate over the controversial 2010 national budget. President Obama has proposed eliminating the long-standing Federal Family Education Loan (FFEL) program and using the savings to provide permanent, mandatory funding for Pell Grants. This would make the Pell Grant program a new entitlement program for low-income students. (Social Security is another example of a federal entitlement program.) President Obama's plan replaces FFEL student loans with federal student loans funded entirely through the federal Direct Lending program.
FFEL Loans vs. Direct Lending Loans
Historically, FFEL loans (Stafford Loans and PLUS Loans) have been financed by banks and other lending institutions that have received subsidies from the Department of Education in order to provide students with lower interest rates and fees. Alternatively, Direct Lending federal student loans are financed by the U.S. Department of Education itself; certain designated financial institutions arrange Direct Lending loans with students on the Department's behalf, using the Department's money.
If President Obama's proposed changes survive the budget battle, the federal student loan overhaul would completely do away with the FFEL program, also referred to as the guaranteed loan program. Some advocates for the student loan industry have claimed this would eliminate the customer service that students receive from lending institutions, but the White House and its supporters note that the Department of Education will still have to contract with private banks to administer the Direct Loans. Another strike against the FFEL program is that it has been prone to conflict-of-interest corruption, which was brought to light during an investigation of the student loan industry in 2007.
Loan Savings Analysis from the Congressional Budget Office
A couple of recent developments in the federal student loan question have raised the stakes on both sides of the debate. On March 20, 2009, the Congressional Budget Office released a preliminary analysis of President Obama's budget, including an assessment that concluded that eliminating the FFEL program and offering all federal student loans through the direct lending program would save the government double what the president's own advisors had projected:
"Under current law, the direct loan program is estimated to have a lower cost for each dollar loaned than does the guaranteed loan program. Thus, assuming that loan volume does not change, replacing the guaranteed loan program with additional direct loans would yield budgetary savings. budgetary savings. CBO estimates that savings would total $94 billion over the 2010–2019 period."
Sallie Mae Changes Its Student Loan Rules
Then on March 23, Sallie Mae, the U.S.'s largest private student lender, announced it is eliminating the loan provision that allowed students to defer interest payments until after graduation. Beginning with the 2009-2010 school year, students will have to pay the interest on their Sallie Mae loans from the day the loan is issued.
Sallie Mae also shortened the maximum loan repayment period from 30 years to 15 years. The company has explained the changes as a promotion of responsible borrowing through which students will build good credit while owing much less money upon graduation. This may be a good option for students who can cover the interest payments while in school. But for other students, a student loan interest payment while trying to work, pay bills, maintain a family, and attend college may be one expense too many.
In either case, Sallie Mae's decision to change its lending practices may have a direct impact on the debate over President Obama's requested student loan program changes.
Overall, the expected resistance to the president’s student loan program overhaul has been relatively low-key (unless Sallie Mae's loan changes are an indirect rebuke). This has surprised student loan watchdogs somewhat, but pleased student advocates who have long called for a more efficient and more helpful student loan system. It will be interesting to watch further developments, and to hear what the final version of the budget has to say, in the months ahead.
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Source: U.S. Congressional Budget Office, "Preliminary Analysis of the President's Budget and an Update of CBO's Budget and Economic Outlook," March 2009 Lisa Ruffino is CourseAdvisor's Editorial Director