Smart Borrower Blog

Student Aid and Fiscal Responsibility Act Ends Government-Backed Private Student Loans

Oct 5th, 2009 @ 4:37 PM by Debbie Dragon

In the past, the federal government guaranteed student loans that were financed by private lenders. Recently, the U.S. House approved a money-saving move that will stop guaranteeing private lender loans and replace them with student loans that are financed through Treasury funds and that are therefore less expensive. This will save the government an estimated $80 billion over a 10 year period.

How will the government use the $80 bill in savings? The savings are meant to provide larger grants and more grants to lower-income students for their college expenses, and to increase federal aid available to community college students. The savings should also make it possible for students who go into public service jobs or other qualified, low-paying jobs to skip repaying a portion of their federal student loans.

According to the Committee on Education and Labor:

The Student Aid and Fiscal Responsibility Act:

  • Invests the bill’s savings in making college affordable and helping more Americans graduate
  • Provides reliable, affordable, high-quality Federal student loans for all families
  • Prepares students and workers for 21st century jobs by providing all Americans with the skills and resources they need to compete
  • Promotes early learning standards reform to ensure the next generation of children enter kindergarten with the skills they need to succeed in school
  • Meets Pay-As-You-Go fiscally responsible principles and reduces the deficit

What is generating the savings? When the federal government stops guaranteeing private lender student loans, the savings are generated from what the private lenders would have collected as profits on the loans. Previously, private lenders had no risk lending money to students because of the government guarantee, which meant the loans were highly profitable for private student loan lenders (to the tune of a multibillion-dollar business!).

While private student loan lenders won’t enjoy the government risk avoidance they have previously, they won’t be pushed out of business completely by the new House bill. Private lenders can still be contracted to service government loans, and can compete for loan business by offering better deals to students than the government in order to entice them to borrow from them over government loans.

About Debbie Dragon
Debbie Dragon is a full time freelance writer and the co-owner of

2 Responses to “Student Aid and Fiscal Responsibility Act Ends Government-Backed Private Student Loans”

  1. TJ says:

    For those seeking more information including why the legislation is not receiving support in all corners there is an in-depth post on the topic at “The Digital Student Blog:”


  2. Arlen Hodel says:

    Hi Michelle Just curious what you mean by A quick skim shows that at least a dozen law firms are “investigatingā€ the deal’ … how do you identify this?

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