This weekend Congress will not only address the controversial health bill that has been championed by President Obama, it will also pursue passage of a bill that seeks to reform the student loan industry.
At first blush, this seems like a great idea. After all, the student loan industry is an inefficient mess. Moreover, critics of the industry are hailing the measure while our friends at Sallie Mae and Access Group are fighting tooth and nail against the legislation. What's bad for Aunt Sallie has to be good for everyone else, right?
Maybe. The key component of the bill is to eliminate the "middle man" in the process of dispersing and administering federal student loans. That is, instead of private companies like Sallie Mae receiving subsidies to handle the student loan process and having the loans guaranteed by the government, the Department of Education will just handle the process itself.
From the standpoint of irate borrowers who have been harassed by Aunt Sallie and her partners in crime, this may be welcomed news. Such a reform could bring some of the private student lenders to their knees and even portend their eventual destruction. From a spiteful standpoint, many may see this as sweet revenge.
There will also probably be some more immediate benefits to those seeking loans. For example, many of these companies charged high fees for initiating loans. This was one way many lenders made money. Without the profit incentive, the government may be willing to allow borrowers to borrow the amount requested without skimming a little off the top for themselves.
Aside from possibly eliminating some absurd fees and sticking it to our unscrupulous creditors, the bill really doesn't help matters too much, however.
While the bill does push the private lenders out of the federal student loan industry, it does nothing to address the private wing of the industry. Many borrowers who are facing the most trouble don't just have federal loans - they also have private loans. In fact, if the federal student loan portion of the business is ripped away from the lenders, they're probably going to start turning the screws even harder on their private borrowers to try to remain solvent.
Sure, intervening too much with the private lending market may be constitutionally and even economically dubious, but the government doesn't have act quite so radically. All it needs to do is allow private student loans to be discharged in bankruptcy - like pretty much all other debt.
If the administration was truly serious about taking on student lending interests, this would be a far more productive battle to wage than simply playing musical chairs with the process for facilitating federal student loans.
The pending legislation also incorporates a partial expansion of the IBR. It, however, seeks to implement the expansion in the worst possible way.
According to The Project on Student Debt, the proposed changes to the IBR (capping payments at 10% of discretionary income and forgiving all debt after 20 years) will only apply to loans originating on or after January 1, 2014. That means current borrowers who have already snared themselves with student loans will not benefit. In fact, anyone enrolling in law school this fall will only have a semester during which this proposal will bear any fruit.
Now, of course, I have a self interest in seeing the change be made retroactive. Nevertheless, that's not my biggest problem with the proposal. I personally find the 15%/25 year plan currently in effect to be reasonable.
The problem with the change is that it departs from the purpose (or what should be the purpose) of the IBR. The IBR allows students who have already sunk themselves with debt to have the opportunity to live somewhat normal lives while paying back a reasonable portion of their incomes.
By delaying the implementation of the new IBR program, the only effect will be to encourage future borrowers (who currently are not saddled with debt) to enter academic programs knowing they may not be required to pay back the balance of their loans. This creates incentives (or at least eliminates disincentives) for students to pursue all sorts of worthless degrees while allowing the law school and other higher education leeches to continue sucking down student loans dollars with relative impunity.
Why don't we really eliminate the "middle man" and just have the government mail checks to these hucksters directly?
What remains to be seen is just how zealously the government will seek to collect on loan repayments. On the one hand, there is no profit incentive, so the mafia-esque techniques employed by the dons at Access Group may no longer be necessary. On the other hand, student loan repayments are a source of revenue for the government, and the IRS has never been known to shy away from using gestapo tactics of its own.
The IBR is bound to become popular and almost certainly will cost the government money. Hopefully, this means that the feds will be more forgiving about making timely repayments.
Here's hoping some government drone eventually loses my student loan paperwork and the Dept. of Ed stops demanding payments.
Esq. Never urges a vote of "Who Cares?" on the pending legislation.