Banks are out as middlemen in the student loan industry. That’s one of the changes brought about by the new health care reform legislation.
That change saves some $8 billion a year in subsidies flowing from the government to the banks and makes the government the sole lender to students seeking loans guaranteed by the taxpayer.
Most of the savings—over half—will go to feed the Pell Grant student aid program, which would soon have been cut drastically—from a little over $5,000 a year to $2,000—without the new law, according to the government. By 2010, the money will also finance 820,000 new grants under the Pell program. Some of the money that used to flow to the banks will go to reduce the federal deficit. Two billion dollars will be invested in community colleges over the next four years.
Eventually the law will modify the rules governing the way student loans have to be paid back. For example, starting in 2014, students borrowing for their education will be able to cap their loan payments at 10 percent of their income above basic living expenses rather than 15 percent, the current figure. And if they make their payments regularly, their remaining debt will be forgiven after 20 years rather than 25. Teachers, nurses and people in the military and other public service jobs will have their remaining debt written off after 10 years.
Banks and other lenders in the student loan business have, predictably, set up a howl about being pushed out of it. Opposition politicians have complained not only about the ideology of anything they can describe as a “government takeover,” but about loss of jobs. The country’s largest student lender, Sallie Mae (or SLM Corporation, originally a government-chartered entity, now a private, publicly traded corporation), has made widely publicized statements about having to eliminate 2,500 of its 8,500 jobs.
But Sallie Mae already outsources jobs; the new law, on the other hand, comes with a proviso that all jobs servicing student loans—for some administrative work will be contracted out by the government—must be done in the United States.
And—though some are protesting as if a bank-based function like home and business lending were suddenly being nationalized—the student loan program has always been a federal program, with the loans financed by Washington. The banks only originated the loans and then sold them back to the government, skimming off their fees while taking virtually no risk.
