Duncan Grilled About Obama’s Student Loan Proposals

Education Secretary Arne Duncan ran into some pointed questions on Capitol Hill Thursday about much of President Obama’s higher education agenda.

Obama’s budget blueprint proposes eliminating subsidies to private lenders who make federally guaranteed student loans. Instead, the government would make such loans directly, with banks and other financial companies merely servicing the loans.

Both Democrats and Republicans on the House Budget Committee questioned whether the Education Department has the capacity to originate all federally backed student loans. Ranking Republican Paul D. Ryan of Wisconsin denounced what he called a “government takeover” of the lending system. Under the president’s proposal, the government would stop providing subsidies to private lenders in mid-2010.

Thomas P. Skelly, director of the Education Department’s budget service, said the department could handle a significant increase in the direct lending program, in part because it still would use private lenders to service those loans.

“The main difference is with direct, the interest borrowers repay comes back to the government,” he said. Under the subsidized private system, “interest stays with the banks. The programs are really very similar.”

Ryan and other Republicans also objected to Obama’s proposal to transform Pell grants for low-income college students into an entitlement, so the funding would not fluctuate according to the annual congressional appropriations process.

Ryan objected to Obama’s plans to make Pell grants another “autopilot entitlement immune from congressional oversight.”

The president proposes increasing the maximum Pell grant to $5,550, indexing the grant to account for inflation and making the spending mandatory, not discretionary — all at a cost of $116.8 billion over the next 10 years.

Duncan said that increases in Pell grant maximums, combined with other higher education initiatives in the budget and the economic stimulus package, would amount to the “biggest boost in higher education funding since the GI bill.”

http://www.cqpolitics.com

Competitive Student Loans

Re “Helping Students, Not Lenders” (editorial, March 4):

While you praise the proposal to eliminate the Federal Family Education Loan Program, you do not factor in the choice and valuable services offered to student borrowers that are a product of the competition between the Federal Family Education Loan Program and the government’s direct loan program. The nationalization of student lending would eliminate those benefits and hurt the very students the proposal intends to help.

The claim that the direct loan program is “less expensive” is tenuous at best, as originating all loans through the direct loan program during the next five years would require roughly $500 billion in new Treasury borrowing.

In the end, we’re confident that federal policy makers will closely scrutinize this proposal, as well as potential alternatives, before terminating a successful 40-year-old program with proven results in providing college access and opportunity for millions of students.

Peter Warren 

President, Education Finance Council

Washington, March 5, 2009

•

To the Editor:

Why do you not support free-market principles in student loans with the same tenacity that you support them in other areas? You endorse a proposal by the Obama administration to abolish guaranteed loans, thereby eliminating all consumer choice and competition in federal student loans.

In an editorial about the airline industry in 2007, you wrote that the government “could have gone further and opened up the American market to more competition, and the superior service and lower prices that come with it.” You also said, “We hope that politicians will embrace the free-market principles they so frequently tout.”

Your support of a government monopoly in student loans — which could eventually have the Department of Education managing $1 trillion in loans — is irreconcilable with your embrace of competition elsewhere.

Competition in student loans has created significant consumer benefits: free delinquency and default prevention services, increasingly important in this economy, as well as better terms, college access programs and consumer-friendly processes.

http://www.nytimes.com

Paying Your Credit Cards With Student Loans

Student loans are supposed to be earmarked for academics, but can they also pay your Visa bill (Stock Quote: V) ? The answer is yes.

After covering $2,500 each semester for tuition at Baruch College in New York City, Jorge Bautista, 26, uses about $3,000 left over from his student loan to buy food and pay off some of his $10,000 in credit card debt.

It is no surprise Bautista is an accounting major: One of his credit cards has a 31% APR. The interest rate on Bautista’s $10,500-per-year federal Stafford loan is 6%.

And his payment strategy is perfectly legal, according to experts.

While federal student loans are limited to the cost of attendance, students get to use the money for living expenses once tuition and fees are taken care of, and college financial aid administrators have little oversight of how that money is spent, says Mark Kantrowitz, publisher of the financial aid site Finaid.org.

Generally what happens is that the proceeds from a student’s loan are sent to their school, and any money beyond tuition and fees (and room and board, if the student lives on campus) is refunded to the student.

“While that money is supposed to be used to further their education, there really aren’t any requirements or controls that prevent a student from using their aid to buy a music CD, for example,” says Kantrowitz. “So long as the student is actually attending classes and actually making progress toward a degree, there is little that can be done to deny those students of those funds.”

The definition of “cost of attendance” is pretty flexible and includes books, supplies, transportation, computers and even child care.

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