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.
Friday, March 19, 2010
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"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."
ReplyDeleteBingo.
Also, has anyone had to deal with the IRS? Just think about federal debt collectors. They are probably exempt from the FDCPA or will be by the time this becomes an issue.
The FDCPA does not apply to Sallie Mae anyway, as they are a direct lender. The FDCPA is only to third party groups, i.e., when the first group gives up on the loan and sells it to a debt collection agency. Nobody gives up on student loans as they are federally insured anyway, so you will not see a change at all.
ReplyDeleteAnyone see Fight Club?
ReplyDeleteI've worked with this issue before, and think your analysis is really good on all the student loan reform posts you've made. If you don't mind, I really feel like I need to add something to what you've written here:
ReplyDelete1) Until this week, student loan reform was effectively dead, thanks to powerful legislators like Ben Nelson and Lamar Alexander, who sided with the lenders.
2) The only reason these very small, incremental reforms were passed is because they save money, and Dems needed the savings in the health care bill to satisfy budgeting requirements.
3) Now that it has been passed, legislators and the dept. of education will be writing the rules for at least a year - plenty of time and opportunity for lender-backers like Nelson to tuck in all kinds of pro-lender provisions.
4) If you want more from DC than what we're getting, you need to get involved. We're incredibly lucky to get what we did. We're likely to lose even these crumbs during the next year if we don't continue to speak UP. So be cynical if you want, but I've seen how this town works. Get involved. There will be people working to strangle any attempt at reform, but we have the same opportunity they do to make this reform so much stronger than it is.
The IBR looks like it will help, but it doesn't attack the root of the problem.
ReplyDeleteThe crux of the problem is the sky-high tuition that needs to be reduced to the real market value. How do we achieve this?
Have all student loans guaranteed by the school instead of by the federal government. If a school stands by their employment figures all of their students will find jobs and none of their students will default which means the schools will have earned their tuition. However, if students do not find jobs and default on their loans, the schools will be on the hook for the loan balance. The schools would either have to lower their tuition or go bankrupt paying back every student loan that defaulted.
Some schools will go bankrupt, but do we really need all these diploma mills churning out crappy graduates?
Since we are in a market economy, I say we take away the federal guarantee and allow market forces determine tuition.
Please explain how this affects my status as a borrower trying to pay Sallie Mae back? I am paying $900 monthly to Sallie Mae, have paid them approx. $32,000 and my balance has only been reduced $2,000. Calls and letters do not resolve anything. Who can help me?
ReplyDelete