Monday, August 1, 2011

Student Loans and Debt Deal

AEM was first to report about the debt ceiling fiasco and how it would effect student loans. CNN has picked up the story and provided information about what students can expect with the outcome of the debt deal (full story here).

Here are a few points worth noting:

Congress would scrap a special kind of federal loan for graduate students. So-called subsidized student loans don't charge students any interest on the principal of student loans until six months after students graduated.
Congress would also nix a special credit for all students who make 12 months of on-time loan payments. 

The other big cut that Congress is targeting is a credit that all students get on the origination fee they pay the federal government to process their loans. Students pay 1% of the loan as an origination fee, but all students get half of that back unless they miss one of their first 12 payments.
The loss of that credit would cost a student who borrows $5,000 from the federal government $25. This would cost students $3.6 billion over the next decade, according to the budget office

Our politicians clearly have their priorities straight and care about educating citizens. Go Congress. You're looking out for all the right things and entities.  No word on what will happen to variable interest rates and current borrowers. One thing is certain. We aren't even in line anymore when it comes to Congress. The indentured educated class has truly been betrayed and on so many levels by this debt deal. It's time we unite and do something about it. Stay tuned for strategy plans.

Related Links

"Quick Update: Default, The Debt Ceiling Fiasco, and Interest on Your Student Loans," AEM (July 31, 2011)

Pedro Nicolaci da Costa, "Default cloud hangs over U.S. job market," Reuters (July 31, 2011)

Gregory Floyd, "It's Time to Question Labor's Ties to Democrats," HuffPost (July 30, 2011)


Anonymous said...

What does it all mean? And where is it all going?

God I feel so lost.

Nando said...

The banks own Congress - as U.S. Senator Dick Durbin said.

Nando said...

The banks own Congress - as U.S. Senator Dick Durbin said.

Anonymous said...

Nando: That is the reason why "reform" is so unlikely. The changes have to be total.

Anonymous said...

On the surface, it is unclear what the banks have to do with any of this. No new FFELP loans can be issued after June 30, 2010; FFELP is the program involving banks, non-bank lenders, state lenders and "nonprofit" lenders. Since then, all new federal loans are issued through Direct Lending.

And the terms & conditions of the existing $500b in FFELPs can't be changed unless the changes do not impact the loan holder, as the loan holder has existing contractual rights. Thus, in general, additional taxes would be needed to "sweeten" borrower benefits on the old loans, unless it is something which simultaneously benefits the borrower and the loan holder.

Looking below the surface, however, the lenders have been fighting to eliminate the Direct Loan borrower benefit programs since they were created a decade ago. They even sued to prevent borrowers from having these benefits (after several years they dropped their lawsuit). Yes, you heard that correct, lenders sued to make loans more expensive for borrowers. It appears that the removal of these borrower benefits is part of a larger plan to return to the bank-based program at some point in the future. There was even language in the Coburn budget plan at one point to fudge the way Direct Lending is costed out, overall, to lay the future groundwork for fake math making the bank-based program look like not as bad a deal for the taxpayer.

It is unclear how removing these borrower benefits saves money. Paying by auto-debit keeps borrowers out of delinquency and default. You can't possibly become delinquent. And providing an interest rate reduction for making a year of consecutive on-time payments is another tool to encourage good repayment habits and thus prevent many defaults. More importantly, it is a classic capitalist use of economic incentives -- something one would think the tea partiers would whole-heartedly support . . .

Anonymous said...

There is no change coming: SLABS and a safe annuity are needed for all the coming retirements. If student loan balances are discharged or modified, what investment would provide satbility to retirements? That is the problem that is holding back any reform.

Unknown said...

Have heard about some issues with regards to student loaning lately, I was quite afraid to pursue my plan in applying for a student loan. Now I'm finding some better reviews to prove that the issues on student loans are wrong and could be corrected.