Major Student Loan Change

Just as a heads up - I read today the Bush administration is proposing doing away with the loan consolidation program.

Without going into the politics of it (please!) I tought there might be some people that should be aware of this.

I would put a link but the NYTimes requires registration so I'll post the whole article.

Tom

 

April 28, 2002

Bush Seeking to Squeeze School Loan Program

By PHILIP SHENON

ASHINGTON, April 27 â?? The Bush administration is seeking to ease its budget shortfalls by squeezing $1.3 billion from a federal student loan program, administration and Congressional officials said today.

The proposal would prevent millions of college students and graduates from consolidating their education loans to lock in low interest rates. It was made this week to Republican budget negotiators by the White House budget director, Mitchell E. Daniels Jr., as a way to deal with budget shortfalls that are expected to push the federal deficit for this year to more than $100 billion.

Democratic Congressional leaders are expected to fiercely oppose the move, which is projected to save an estimated $1.3 billion for the government this year, as unfair to the millions of Americans who depend on federal student loans.

Officials said the White House proposal would end a program that has allowed college and university students and graduates to consolidate their student loans at a federally subsidized, fixed interest rate and take up to 30 years to pay them back.

Under the proposal, the consolidated loans would be offered only at variable rates. This is expected to make them far less appealing and ultimately save the government billions in subsidies for the program. The change would not affect students and graduates who have already consolidated their loans.

A spokesman for Mr. Daniels, Trent Duffy, confirmed that the proposal had been forwarded to Congress in discussing the administration's request for a $27 billion supplemental spending bill for the rest of the year, much of it for counterterrorism programs.

Mr. Duffy said the loan proposal was "very preliminary" and was offered as an option to make room in the budget for spending elsewhere. Officials said Mr. Daniels noted to the House Republicans that the proposal would offset a $1.3 billion shortfall this year in the budget for Pell Grants, the education grant program for low-income students.

David Sirota, a spokesman for Democrats on the House Appropriations Committee, which must act on the supplemental spending bill, said Democrats would oppose the change because it would effectively raise the interest on education loans for millions of Americans.

"The president and his budget director are finally being honest about their misguided priorities â?? more tax cuts for Enron paid for by effectively raising taxes on middle-class students and their families," Mr. Sirota said.

The federal government began the loan consolidation program in 1986. It allows a college student or graduate burdened by a number of variable-rate education loans to merge them into a single loan guaranteed by the government, with a fixed interest rate, to be repaid over as much as 30 years. Under the current program, the interest rate is capped at 8.25 percent a year.

But critics, including some private lenders, say it has allowed high-income college and university graduates â?? including doctors, lawyers and other professionals â?? to consolidate education debts at the federal government's expense. Government officials said the program had cost the government billions of dollars.

The program's appeal to borrowers is obvious from promotional material distributed by Sallie Mae, the quasi-governmental educational lender, which refers to the debt consolidation plans with the brand name "Smart Loan."

Unlike other loans, the consolidation loans are offered without any credit checks, service fees or prepayment penalities â?? costs that are effectively assumed by the federal government, which also assumes the risk if there is a default on the loan.

With the low interest rates, borrowers are able to lock in rates that would otherwise have inched up over time â?? and would have brought in higher interest payments to the government and to private lenders.

Kathleen deLaski, the chief spokeswoman for Sallie Mae, said the switch to fixed loans in the consolidation program would have "no significant impact on our business" because it would be "interest-rate neutral," with rates rising and falling over time.

But Ms. deLaski suggested that there was logic to the administration's change, because it would free federal money that could be used elsewhere in the government, possibly for other education programs.