Bay College Planning Specialists

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Obama’s Budget ‘Nationalizes’ College Loans


President Obama is promoting a college education as a way to lift the incomes of working the-college-pros5families. His recently announced budget plans would help needy families by further increasing the Pell Grant and linking its maximum value to inflation. The money to do this will come from slashing the $4 Billion in government subsidies and guarantees to private banks that make college loans. Ending the subsidies essentially puts all new student lending into the government’s hands – effectively ‘nationalizing’ the system.

The change threatens the business model of the private student lenders, since the subsidy supports their earnings on student loans that have relatively high levels of default. The share price of Sallie Mae, one of the largest private lenders, fell 31% on this news. Private lenders would continue to service and collect on existing loans.

Currently about 64% of all student loans are private loans, with the remaining 36% being direct government loans from the Department of Education. Although the President’s budget ideas are not yet enacted into law, it is clear the Administration is moving in this direction, which they say would save taxpayers more than $47 Billion over the next decade. Congress took a step in the same direction by passing the College Cost Reduction and Access Act of 2007, when it reduced the subsidy to the private lenders. The private sector has since had difficulty financing student loans during the credit crunch, requiring the government to step in as the ‘lender of last resort’. I have always recommended direct government loans over those from private lenders due to their lower fees and the relative ease of consolidating the loans after graduation. As long as higher education remains a social priority for the government, this is a positive change in my view.

—–UPDATE —–

 

President Obama’s 2010 budget proposes several key changes to federal student aid programs. In this edition of the SimpleTuition newsletter, we summarize and highlight the major points of this budget as they relate to student financial aid and higher education.
The proposed budget will be undergoing review and revisions until it takes effect in the 2010-11 school year. Until then, follow our E-newsletters for updates on the budget’s changes.  A very resourceful website to visit is , where you can search, compare and apply to both federaland private student loans.
 

 

Please note that this budget proposal is subject to review and revision and Bay Area College Planners will be following this process and reporting on updates.

 

Summary of Budget Proposal

Federal Family Education Loans

One of the most material changes to federal student aid programs is the proposed elimination of the Federal Family Education Loan program or FFEL by the start of the 2010-11 school year, which according to the budget proposal, “needlessly costs taxpayers billions of dollars”. All new federal loans will come through the Direct Loan Program according to the President’s budget, saving more than $4 Billion a year which will be reinvested as aid to students. The Direct Loan Program allows the Department of Education to act as a lender and provide funds for StaffordPLUS and GradPLUS Loans.

Contrary to many press reports, the President’s proposal does NOT eliminate private student loans (also known as “alternative loans”). Private loans are used to supplement federal student loans. This proposal removes private lenders from the marketing and administration of federal loans but does not eliminate private/alternative loans which are credit-based products not guaranteed by the government.

Federal Pell Grants

The Federal Pell Grant Program provides need-based grants to primarily low-income undergraduate and certain graduate students (those pursuing teaching certifications) to promote access to postsecondary education. President Obama’s budget proposes a $5,350 Pell Grant maximum award for 2009-10 and $5,500 for the 2010-2011 school years. This is up from $4,731 for 2008-2009.

Focus on College Completion

With the proposal of a new five-year, $2.5 billion Access and Completion Incentive Fund, the Administration aims to support innovative efforts by states to help low-income students succeed and complete their college education. Further, according to the proposal, “the program will include a rigorous evaluation component to ensure that we learn from what works.”

Federal Perkins Loans

The budget proposes to completely overhaul the Perkins program, which it describes as “inefficient and inequitable.” The new updated Perkins Loan program “makes campus-based, low-interest loans more widely available.” The fund that will support this program will be operated federally instead of the current campus-based current administration.

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