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Buried in the health care reconciliation package passed by Congress on Thursday was another far-reaching overhaul of the federal student loan system.
The Student Aid and Fiscal Responsibility Act “eliminated the middlemen of student lending,” said Mark Brewer, professor of political science at the University of Maine. “Virtually all federally guaranteed student loans would be provided directly by the federal government.”
The system of student loans that has been in place for years has had the federal government guarantee against default of student loans issued by third-party banks.
Under the system passed last week, the Department of Education’s Federal Direct Loan program will originate all new student loans starting next year. Third-party banks will still be retained by the government to service the loans. The bill also allocates $2.55 billion in federal funding to historically black and minority-serving colleges, as well as $2 billion to community colleges for job training.
The Congressional Budget Office has estimated this shift will save roughly $61 billion during the next 10 years, $40 billion of which will be redirected to increasing federal Pell Grants for low-income students. By the 2019-2020 academic year, Pell Grants will have risen from $5,550 — the current Pell Grant cap — to $5,900, and will be issued to more students.
Dean of Students Robert Dana said shifting student loans to the public sector will probably decrease interest rates.
“Any time you can reduce the middleman, it’s all for the better because rates will be lower,” Dana said. “We’ve got to have lower student loan rates. The burden is preposterously high right now.”
Dana said the new system would make applying for and receiving loans easier. He simply said: “Less hassle, less bureaucracy, less interest equates to better.”
Brewer is taking more of a wait-and-see approach.
“I think it’s too early to say how this will affect students,” Brewer said. “Proponents have been saying all along that it will benefit students by making it less onerous to apply for and get loans by eliminating service agencies like Sallie Mae or Nelnet. That will depend on how the program is implemented. I’ve heard some people argue that it will result in lower interest rates, but there’s no guarantee that will happen.
“The one thing you can say for sure is that the servicing costs of these third-party institutions is probably going to disappear,” Brewer said.
