Bill to Divert Government Loan Subsidies From Banks to Students
May 12, 2005 7:38 PM
SF State stands to gain up to $5 million in federal grants for financial aid if bipartisan legislation introduced before Congress is approved, a public interest research firm says.
The legislation, know as the Student Aid Reward Act (also known as the STAR Act), would steer federal student loan subsides away from banks and lending institutions and into the hands of universities that have switched or already participate in the Direct Student Loan program.
“We’re taking money we now give to banks and lenders and giving it to students,” said Merriah
Fairchild, the higher education advocate for the California Public Interest Research Group. CALPIRG is a non-profit public interest advocacy group working on behalf of consumers, the environment, and good government in California, according to its Web site.
Universities throughout the nation have their pick of two federal student loan programs: the Federal Family Education Loan program or the Direct Loan program.
Private lenders and banks support the Federal Family Education Loan program. It’s the larger of the two government-subsidized programs.
SF State participates in the Direct Loan program, which is funded through the U.S. Treasury.
CALPIRG’s research estimates more than $4.4 billion would be saved next year if every school participating in the family loan program switched to the Direct Loan Program. This year’s study shows the Direct Loan program saves taxpayers $11 for every $100 loaned to students. The estimates were compiled using the estimated federal subsidy rates for 2006, which are slightly lower than this year’s rates, Fairchild said.
Barbara Hubler, SF State’s director of financial aid, said it would be wonderful if the STAR Act passes.
“The fact is that lenders make a lot of money on student loans. They’re going to try hard to make sure it doesn’t come along,” she said.
Tom Kiley, a spokesman for Congressman George Miller (D-California), a co-sponsor of the STAR Act in the House of Representatives, agreed the fight will be difficult.
The congressman’s legislation is aimed at addressing the difficulty most families are having in affording college, Kiley said. He added that he believes getting universities to switch loan programs is a way to fund financial aid increases when government funds are tight without costing the taxpayer anything.
“If federal funds are so scarce, wouldn’t it make sense to spend money on students (rather) than on profitable banks?” he said.
Fairchild said she agrees, which is why her group is so strongly advocating this bill. Pell grants, a federally funded grant to needy college students, have not kept pace with inflation, she said. Part of the predicted savings realized when universities switch from the FFEL loan program to the Direct Loan program will be returned to students in the form of financial aid increases of up to $600, Fairchild added.
“Six hundred dollars won’t solve the problem," she said. "But it’s a step in the right direction.”
Kevin Bruns, the executive director of America’s Student Loan Providers, an umbrella group representing the student loan industry, said financial aid administrators believe that having a choice between the two programs has greatly improved customer service. The point was acknowledged by SF State’s director of financial aid, Barbara Hubler.
Lenders within the FFEL program can also waive loan origination fees and give students interest rate breaks for on-time payments, something the Direct Loan program cannot do, Bruns said.
Bruns challenged the forecasted savings predicted by supporters of the STAR Act, since much of the savings are based on the most favorable interest rates possible, he said.
In July, student loan interest rates are expected to rise by up to 2 percent, which would increase the interest paid by borrowers to the Direct Loan program and decrease the total costs of the Direct Loan program. But if interest rates were to fall again, any potential savings would diminish as well.
With interest rates in constant flux, it’s difficult to accurately forecast long-term savings, said Bruns.
"Frankly, we think costs are pretty close," he said.
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