Student Loans

Modest Increases Proposed for Pell Grants

Dept. of Ed Details Student Loan Rescue Program

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Minnesota Unveils Accountability ‘Dashboard'

To celebrate Independence Day, Higher Ed Watch will be going on hiatus next week. But before we go dark, we thought we'd remind you of some important changes coming to federal student aid that will save students money and hopefully eliminate some of the worst abuses that have occurred in the Federal Family Education Loan (FFEL) program in recent years.

Most of these changes are the result of two pieces of legislation enacted in the past year: the College Cost Reduction and Access Act (CCRA) and the Ensuring Continued Access to Student Loans Act of 2008 (which we will refer to as the "bailout bill"). Both contain provisions that go into effect on July 1.

The most substantial changes are to the federal student loan programs and the interest rates charged on these loans.

Under CCRA, the interest rate on subsidized Stafford Loans -- which generally go to students from families making less than $80,000 and accrue no interest for the borrower while in school -- will halve over the next four academic years. As a result, borrowers taking out a subsidized Stafford Loan after July 1 will have a fixed interest rate of 6.0 percent, 0.8 percentage points lower than available today. [Borrowers with unsubsidized federal loans will continue to pay a 6.8 percent fixed rate] In subsequent years, interest rates will drop to 5.6 percent, 4.5 percent, and then 3.4 percent by the 2011-2012 academic year. After that, absent any further Congressional action, rates will return to the previous level of 6.8 percent.

Too many times of late, we have seen mainstream journalists fall for the spin of lenders, who in the wake of the credit crunch have had a vested interest in raising panic levels about the availability of student loans.

That's why it's such a pleasure for us to see good, critical, and insightful reporting on the loan industry receive the recognition it deserves. Case in point: Paul Basken, a senior reporter at The Chronicle of Higher Education, has received a National Press Club award for a revealing piece he wrote last May showing how the revolving door between the Bush Administration and the student loan industry brought great rewards to Sallie Mae and put financially needy students in harm's way. [Disclosure: the author of this post used to work for the Chronicle.]

We wrote about Basken's article last year. But at a time when the student loan scandals of yore are fading fast from memory, we felt that it was important to remind our readers of just what he found. The conflict of interest that he uncovered still exists and needs to be dealt with.

Student loan industry officials have been pushing Congress to revisit cuts it made last fall to subsidies lenders receive for participating in the Federal Family Education Loan (FFEL) program. They cite job losses in the industry as one reason to boost subsidies.

“How do you feel about thousands of hard-working people being laid off?” one advocate for FFEL recently wrote to Higher Ed Watch. “Because that's really the biggest tragedy of the College Cost Reduction and Access Act...FFEL lenders haven't gone away, but thousands of people's jobs have!”

There is no doubt that fewer people are employed in the FFEL industry as a result of both the subsidy cuts and credit market turmoil. But while we are sympathetic to the hardships that these job losses cause individuals and their families, we take issue with the argument that FFEL job losses represent a major public policy problem. In fact, the jobs argument confuses the real problem: the lack of an auction for setting lender subsidies makes it impossible to determine just how many FFEL jobs are actually needed.

Compromise Reached on Major Expansion of G.I. Benefits

Bill Would Prevent Lender Discrimination

New SAT Little Better than the Old One

At Higher Ed Watch, we have written much about the U.S. Department of Education's lax oversight over the lenders and guarantee agencies that participate in the Federal Family Education Loan (FFEL) program. But until we read a recent investigative report in the St. Petersburg Times, we didn't fully grasp just how lax that oversight has been.

As that report revealed, the Education Department does not conduct criminal background checks on individuals who are seeking to become eligible FFEL lenders. The agency leaves it to student-loan guarantee agencies to verify eligibility for participation. But apparently most guarantors often don't even bother to ask about past criminal records of those who apply to become federal student loan providers.

As a result, the St. Pete Times reports, some convicted felons and others with criminal records have gained entry into the guaranteed-loan program and taken advantage of the rich rewards the government bestows on lenders that participate in the FFEL program.

California Bill Would Create Higher Ed Accountability Framework

Challenging Perceptions of the ‘Model Minority'

Report Calls for More College Cooperation on Merit Aid

When interest rates on variable rate Stafford loans reset this July to a low 3.61 percent (4.25 percent after the six-month grace period for recent graduates) the consolidation loan market, once robust and competitive, will be a shadow if its former self. There are policy explanations, economic explanations, and of course, political explanations for the change in the consolidation market. And like many things in student loan policy, the story is filled with irony.

Not Many Loans Left to Consolidate

As we pointed out earlier this week, borrowers with variable rate Stafford loans (those originated before July 2006) will be able, as of July 1st, to lock in the new low rate for the lives of their loans by refinancing. However, demand for this option may be low, as few borrowers are likely to have any unconsolidated, variable rate Stafford loans left (consolidation is a one-time option). From 2002 to 2006, interest rates on these loans dropped so low that nearly all borrowers who were eligible at the time to consolidate their loans did so, locking in rates between 2.77 and 5.30 percent. For a brief time, even borrowers still enrolled in school could refinance their loans, though in-school consolidation was discontinued as part of the Higher Education Reconciliation Act of 2005. What’s more, new loans taken out since July 2006 all carry fixed interest rates, removing the main benefit of consolidation.

We have long been concerned about the close ties between the student loan industry and the National Association of Student Financial Aid Administrators (NASFAA), an organization that lobbies on behalf of college aid officials. These ties have been so strong in recent years that the group's policy positions on student loans have more often than not mirrored those of the Consumer Bankers Association and Sallie Mae.

NASFAA's leaders deny that lenders have influence over the organization's policy positions. In arguing this point, they often note -- as the group's former president Dallas Martin did in an interview with The Wall Street Journal last year -- that the association prohibits loan industry officials from serving on its national board or voting "on policy and membership issues."

What they fail to mention, however, is that these rules do not apply to the organization's state affiliates and regional associations. In fact, by most accounts, these groups depend heavily on student loan providers for both leadership and financing.

Attention recent college graduates: starting July 1st, you will have a once-in-a-lifetime opportunity to significantly reduce your federal student loan costs. We at Higher Ed Watch are telling you this, because if some in the student loan industry get their way, you may never hear about it.

For six months beginning July 1st, members of the Class of 2008 who have taken out variable interest rate federal student loans will have the opportunity to refinance those loans and lock in a low, fixed 3.61 percent interest rate. That's about 3 percentage points lower than the variable rate that was set last year. This is the biggest one year drop in student loan interest rates ever, and the 4th lowest interest rate in the 15 year history of the student loan consolidation program.