Smart Borrower Blog

Bad News For Lenders of Student Loans

Jun 26th, 2009 @ 2:17 PM by Alden Smith

With the ever soaring cost of higher education, student loans have been an almost indispensable tool when trying to put the kiddies through college.   Tuition has reached a level of $50,000 a year in some private colleges and universities.   At that rate, a graduate can expect to be in debt for a quarter of a million dollars.

Over the years there have been three kinds of loans available.   Federally guaranteed loans are made by private lenders and guaranteed by the government, Direct loans are made by the federal government and of course there are unsubsidized private loans.   Guaranteed loans have been the most popular way for students to go.   The government guarantees the loan, and pays the lender a subsidy.   With the government backing these loans, the lender is almost completely assured that there will be no loss.

Up till now, the government had provided tens of billions of dollars every year for financing the student’s education.   An article in the New York Times indicates that this may soon come to a screeching halt.   The Obama administration wishes to scrap the guaranteed loan program, and simply make the federal loans currently available directly from the government.   Certainly, it would save billions of dollars, because the federal government would be no longer paying subsidy payments to lenders. The Obama administration would like to see that extra money they save go towards grants for needy students.

The private loan industry of course wants nothing to do with the sweeping change.   It’s understandable, when you consider that they will suffer a huge loss of revenues on loans that they know won’t go bad on them.   There isn’t any default when the government guarantees the loan.

Personally, I think that this is an excellent idea.   In a previous post, I talked about Sallie Mae, the huge student loan lender.   In 2008, Sallie Mae lost $213 million.   Yet they still paid their chief executive more than $4.6 million in cash and stock.   That isn’t the half of it.   Sallie Mae’s vice chairman got a whopping $13.2 million in cash and stock and the use of a company plane.   I’m no socialist by any means, but to see this kind of excess in a company that has lost $213 million in the past year tends to tick me off.   I don’t know how many times I hear on the news that the banks and lenders “just don’t get it.”   Obviously, they don’t.

The president’s plan would help to increase Pell grants and make them mandatory.   This is good news for students in need.   It would also wrest control by Congress over these grants which a lot of politicians are not too happy about.

Before an aspiring student gets all excited about these changes to government loans, New York Times reports that the increase in dollar amounts available under the new proposal would only be a few hundred dollars more in available funds.   Every little bit helps, and as far as I’m concerned, if the federal government can save billions of dollars in subsidy payments, this can only be a good thing.