CONGRESS IS MOVING toward major changes in the student loan program as part of its drive to balance the budget within seven years. A Senate plan, approved in committee last week, would cut $10.8 billion from the plan over seven years, charge colleges 0.85 percent of all loans they benefit from, eliminate students' six-month after-graduation grace period before interest is charged, and cut back the direct-loan program handled by colleges from 30 percent of total loans to about 20 percent. A House bill, also approved in committee last week, would be more drastic, including outright elimination of the direct loan plan. How would students, universities and banks be affected if these changes became law?
Robert J. Massa
Dean of enrollment, the Johns Hopkins University
Our experience has been that the direct loan program gives students their loans considerably faster and with much less hassle than when they go through a bank and a separate guaranteeing agency. The Republicans in Congress have established new accounting rules showing that by cutting back the direct loan component of the program, some money could be saved. The Office of Management and Budget has figures showing that it would cost more.
I'm not qualified to say how the cost to the government works out, but cutting back the direct student loan program is definitely a step backward from the student's point of view.
It is of course much easier to advocate balancing the federal budget than it is to advocate specific cuts that hurt individuals, so the Congress certainly has a difficult issue in front of it. But we regard the proposed 0.85 percent fee as a new tax. Like any tax on an institution, it is sooner or later passed on to the people the institution serves, in our case, the students. We benefit from about $24 million in student loans, so this fee would cost Hopkins an additional $204,000, from our student-aid resources.
Federal representative, American Bankers Association
Higher education institutions have become highly dependent on the guaranteed access to capital that their students have through the student loan programs. It costs the government money to supervise these programs, and the Congress is looking for ways to spread the costs among those who benefit. The 0.85-percent fee is not much to ask of colleges for assuring that virtually every student who qualifies can go to college.
No student while in school will suffer either a reduction in the loan amount or an increase in fees to either banks or the government. Once the student graduates, he will now be responsible for either making payments immediately or allowing interest to be added to the capital amount of the loan for the first six months after graduation. For people who get a basically interest-free loan for all the years they are in school, this will mean an average of about $4 a month in additional payments over the term of the loan. It doesn't seem fair to make an assembly line worker pay taxes to subsidize the interest-free grace period of someone who has graduated from college and is working as perhaps a lawyer in Washington.
The lenders, banks, will bear the greatest single share of the overall pain, to the point that some lenders will have to reconsider whether they want to go on participating. The smaller lenders lose on every loan they make, and only those with very big portfolios can make money on student loans. Eliminating or limiting the direct student loan program is important because it costs more money than it brings in to the government. The Congressional Budget Office has estimated that it is costing the government $1.5 billion a year.
William D. Leith
Director of student aid, University of Maryland
Because we have many students using these loans, we estimate that the 0.85-percent new tax would add about half a million dollars a year to our expenses.
Elimination of the after-graduation grace period clearly increases the cost of borrowing for the student, because it adds six months to the period that is subject to interest and therefore makes the borrowing more expensive over the time the loan is in effect.
The proposed 20-percent cap on the direct loan program will have the effect of limiting competition between the direct program and the Federal Family Education Loan Program, which is the guaranteed loans obtained through banks. Many students benefited from that competition since the direct loan program was instituted in 1993. The introduction of the direct loan clearly created competition that made the banks handle their loans more efficiently and more effectively.
At the same time, I think advocates of the direct loan program would acknowledge that the existence of the bank-based program made the colleges more efficient in administering the direct program.
With a 20-percent cap on the direct program, the benefit of this competition is likely to be lost.