Obama's proposal to revamp student loans is problematic
The Internet (Abridged)
Clint Fullen
Issue date: 4/15/09 Section: Opinion
Though President Barack Obama's proposal to overhaul the student loan industry deserves some recognition, the policy seems a little too ambitious.
According to The New York Times, Obama aims to "end a subsidized loan program and redirect billions of dollars in bank profits to scholarships for needy students."
The Department of Education reports this budget will expand the role of Pell Grants and make low-interest Perkins loans more available.
The Department of Education defines subsidized loans as aid in which the "borrower is not responsible for the interest while in an in-school, grace or deferment status." The loans are given through private banks and credit unions, but the interest is paid through federal spending.
The process is nearly risk-free for lenders. The New York Times reports the government guarantees up to 97 percent repayment for failed loans.
In theory, Obama's system warrants a gold star.
However, this system could only transition smoothly if an industry for government-subsidized loans did not already exist.
Without lenders already using federal funding as a crutch, the president's proposal would make financial aid more accessible to students while saving the government billions of dollars.
If only it could be that easy.
The truth is that subsidized loans are an enormous component in the economics of higher education. USA Today reports that the subsidized loan program, or the Federal Family Education Loan Program, accounts for about three-quarters of all student loans.
Last year, the FFEL program provided $56 billion in loans to 6 million students, according to The Los Angeles Times.
With this amount of money involved and the prospective number of lost jobs, the subsidized loan industry has wedged itself into a very inconvenient but necessary position.
In the interest of students, the president's proposition holds many beneficial elements for families seeking a helping hand.
According to the Department of Education, the 2010 budget raises the maximum Pell Grant award to $5,500. More importantly, Pell Grant spending will become mandatory and have the ability to increase along with inflation.
For the first time since the establishment of the grants, annual raises will be provided to recipients, according to The Los Angeles Times.
Also, the Congressional Budget Office projects that such a strategy would save $94 billion over the next decade, according to The New York Times.
Obama's budget unquestionably holds many favorable components. The proposal eliminates the middleman, saving billions and preventing students' involvement with treacherous financial markets.
Nevertheless, thwarting an entire lending industry with one fatal swoop does not seem like the most reasonable approach, especially in this economic climate.
Somewhere in the murky land of politics, there has to be some middle ground.
Obama's premise is promising: turning safety nets for lending corporations into risk-free grants for students in need.
But by running with this plan too quickly, Washington may stumble and fail, hurting many more Americans in the process.
Clint Fullen is a columnist for The Arkansas Traveler. His column appears every other Wednesday.
According to The New York Times, Obama aims to "end a subsidized loan program and redirect billions of dollars in bank profits to scholarships for needy students."
The Department of Education reports this budget will expand the role of Pell Grants and make low-interest Perkins loans more available.
The Department of Education defines subsidized loans as aid in which the "borrower is not responsible for the interest while in an in-school, grace or deferment status." The loans are given through private banks and credit unions, but the interest is paid through federal spending.
The process is nearly risk-free for lenders. The New York Times reports the government guarantees up to 97 percent repayment for failed loans.
In theory, Obama's system warrants a gold star.
However, this system could only transition smoothly if an industry for government-subsidized loans did not already exist.
Without lenders already using federal funding as a crutch, the president's proposal would make financial aid more accessible to students while saving the government billions of dollars.
If only it could be that easy.
The truth is that subsidized loans are an enormous component in the economics of higher education. USA Today reports that the subsidized loan program, or the Federal Family Education Loan Program, accounts for about three-quarters of all student loans.
Last year, the FFEL program provided $56 billion in loans to 6 million students, according to The Los Angeles Times.
With this amount of money involved and the prospective number of lost jobs, the subsidized loan industry has wedged itself into a very inconvenient but necessary position.
In the interest of students, the president's proposition holds many beneficial elements for families seeking a helping hand.
According to the Department of Education, the 2010 budget raises the maximum Pell Grant award to $5,500. More importantly, Pell Grant spending will become mandatory and have the ability to increase along with inflation.
For the first time since the establishment of the grants, annual raises will be provided to recipients, according to The Los Angeles Times.
Also, the Congressional Budget Office projects that such a strategy would save $94 billion over the next decade, according to The New York Times.
Obama's budget unquestionably holds many favorable components. The proposal eliminates the middleman, saving billions and preventing students' involvement with treacherous financial markets.
Nevertheless, thwarting an entire lending industry with one fatal swoop does not seem like the most reasonable approach, especially in this economic climate.
Somewhere in the murky land of politics, there has to be some middle ground.
Obama's premise is promising: turning safety nets for lending corporations into risk-free grants for students in need.
But by running with this plan too quickly, Washington may stumble and fail, hurting many more Americans in the process.
Clint Fullen is a columnist for The Arkansas Traveler. His column appears every other Wednesday.
Viewing Comments 1 - 2 of 2
collegeloanconsultant
posted 4/15/09 @ 12:57 PM CST
Most FFELP lenders dropped out of the program after Congress cut their subsidies. For banks, there is no longer any advantage to making unsecured loans at low interest- not when they can charge 21% (or more) for credit cards. (Continued…)
Foxwood
posted 5/06/09 @ 9:24 PM CST
Remember Animal Farm. Napoleon is going to take your puppies and they will come back to bite you. A student loan bring with it servitude.
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