As part of the groundbreaking health care package passed last week, Congress voted on March 25 to pass legislation that included a significant overhaul of college assistance programs. The overhaul will force commercial banks out of the federal student loan market. In an effort to restructure and streamline financial aid programs, the new measure mandates that private banks will no longer be allowed to make federally-subsidized student loans.
According to the Congressional Budget Office, the move to the government’s Direct Lending (DL) program is expected to save taxpayers about $61 million over ten years by cutting out the middleman of private lenders in loans made to low- and middle-income college students. Director of Financial Aid Jennifer Garratt Lawton, however, does not anticipate that the overhaul will have any effect on the University’s current financial aid policies, as Wesleyan made the transition to DL at the beginning of the 2009-10 award cycle.
“We made the move at that time because it was clear to us that we would be able to provide our students a superior processing experience using DL over what had been happening in the previous two award cycles,” Lawton wrote in an e-mail to The Argus.
The shift to DL gives current University seniors students the option to consolidate all of their previous bank-backed loans into one loan held and serviced by the Direct Loan program.
“The banks were offering fewer consolidation options and our students would have ended up with multiple monthly payments upon graduation had we not decided to participate in DL,” Lawton explained. “[Now they have] the option to consolidate under that program if they choose.
Those who oppose the overhaul, such as the private loan industry, argue that the bill will cost them thousands of jobs, and that government control over these loans is simply unnecessary.
However, private lenders, such as Sallie Mae and Citigroup, will continue to play a role in the government lending business by competing for contracts to service the loans.
In a recent interview with NPR, Education Secretary Arne Duncan explained that, “[the government] already bore the risk on it [by subsidizing private loans]. So the game isn’t really who’s initiating the loan. The game is in servicing the loan, and the servicing of the loans will all be done by the private sector. So it’s not our sweet spot, not our core competency. Good actors will get more business, bad actors will get less business.”
In fact, under the new legislation, private lenders will continue to service about $500 billion outstanding student loans. Other new changes implemented by the overhaul will aid in increasing the efficacy of student lending programs and stabilize national affordability of higher education. Such changes include an increase in Pell Grants, and a decrease in income caps on loan repayment from 15 percent to ten percent beginning in 2014.
Lawton noted that since changes to the Pell Grant will not go into effect for several years, only future University students would benefit from the increase in the maximum grant to $5,900 in 2019-20, from $5,550 for the 2010-11 school year.
“Some of the original proposals [for the bill] included more funding for Pell grants, which would have helped all students including those receiving Pell grants here,” said Lawton. “It would have been great to receive even more funding, but hopefully that will be addressed in the future.”
Although the Pell Grant has also been stabilized under the new legislation to automatically increase in proportion to inflation, some believe this measure is inherently insufficient.
“I’m glad that Pell grants will finally be automatically adjusted,” said Nick Marshall ’10, a student loan recipient. “But the fact of the matter is that the initial increase the government is making isn’t enough to catch the Pell grants up with current inflation to begin with.”
Furthermore, the initial increase of $350 is negligible when compared with the rates at which tuition—for public and private colleges—rise annually. Just in the past year, Wesleyan’s tuition increased by five percent, from $39,822 in the 2009-2010 academic year to $41,814 for 2010-2011. However, Obama administration officials say that without the new legislation, the current state of federal student aid would have cut $2,150 from Pell grants, with about 500,000 students being dropped from the program.
“It’s unfair how much we have to pay for school, period,” said Pell Grant recipient Ben LaFirst ’11. “Higher education should be paid for by the government. So I think this new system of de-privatizing federal loans is a big step in the right direction.”