On August 3rd, the Secretary
of Education's Commission on the Future of Higher Education released the third
draft of its report. Buried at the bottom of page 19 was a new and disturbing
proposal to eliminate "non need-based" student loans. The paragraph
suggests that 75% of federal student loans should be shifted to the private
market. This would dump millions of students into loans that can be far more
expensive and risky than federal loans.
Under such a policy, an
estimated $168 billion in unsubsidized Stafford loans would be dumped into the
private loan market over the next five years. This would cost students an estimated
$32 billion or more in additional interest payments. The draft report falsely
claims that such a change would generate significant savings that could be used
to increase federal need-based aid. In fact, the potential savings are limited
at best, and far outweighed by the increased costs and risks for students. In
2005-6, 4.6 million students took out unsubsidized Stafford loans.
What are "non need-based"
student loans?
While the Commission report
does not spell this out, these are primarily unsubsidized Stafford loans and
PLUS loans. The term "unsubsidized" refers to the fact that interest
accrues on the loan while the borrower is in school. The federally guaranteed
interest rate on unsubsidized Stafford loans is 6.8%, and these loans come
with protections for borrowers such as rights to deferral, forbearance, and
income contingent repayment. PLUS loans are 8.5% loans that are offered to
parents and graduate students.
Who receives "non
need-based" student loans?
These loans mostly
go to middle-income students. According to the Department of Education,
in 2003-2004, 84% of independent students with unsubsidized Stafford loans
had incomes below $50,000 (and 66% earned less than $30,000). Among dependent
students, 72% of those with unsubsidized Stafford loans came from families
earning $100,000 or less (and 35% had family incomes below $60,000).
Who is hurt by such a
policy?
Students and families.
Private loans cost significantly more than federally guaranteed loans, particularly
for middle-income students with poor credit or no credit history. Stafford
loan interest rates are currently fixed at 6.8%, while private loan rates
range from 7% to 14%.
Eliminating unsubsidized Stafford loans particularly disadvantages poor, first-generation
or independent students. In addition, federal loan forgiveness programs, such
as those for teachers and members of the military, apply only to federal loans.
When loan companies sell portfolios of student loans to investors, they provide
data about the group of loans sold. A review of five different portfolios
representing several billion dollars of loans reveals average interest rates
today of 9.77%, 9.91%, 10.0%, 10.11% and 10.35%. Many borrowers, at least
15% according to the investor reports, are charged interest rates of more
than 12%. These portfolios likely serve students with relatively good credit
ratings (often with a cosigner) and attending private colleges and universities.
Rates would be higher for students with lower or no credit scores.
Between 2007 and 2012, the Department of Education estimates students will
take out $168 billion in unsubsidized Stafford loans. A 9.77% interest rate
(the lowest average we found for a private loan portfolio), would cost borrowers
$32 billion in additional interest over the course of repayment as compared
to the current 6.8% rate for federal student loans.
In 2005-6 the average unsubsidized Stafford loan was $4,344. Over four years
that would amount to a total of $17,376 in college debt. The difference between
repaying $17,376 at 6.8% compared to 12% is nearly $6,000 in interest over
the life of the loan (assuming a standard 10-year repayment period). Because
interest rates will likely continue rising, this is a low estimate of the
increased cost for a middle-income borrower under the proposed policy change.
Beyond their higher cost, private loans offer none of the borrower protections
of federal student loans. Unlike federal loans, private loans typically have
uncapped interest rates that can make borrowers vulnerable to extremely high
debt burden, and private loans offer no safeguards in the case of illness,
unemployment or other unexpected difficulties.
Who stands to benefit
from such a policy?
Private lenders. Federal
student loans cap the interest rate for borrowers and offer them a relatively
low interest rate regardless of income. Private student loans, with higher
interest rates and fewer restrictions, offer lenders the potential for significantly
larger profits.
Would eliminating unsubsidized
Stafford and PLUS loans generate significant additional revenue for the federal
government?
No. According to
the President's Fiscal Year 07 budget, the unsubsidized Stafford and PLUS
loan programs are actually projected to generate $500 million in income to
the government this year. While there are costs associated to running these
programs, eliminating them does not free up significant new resources as claimed.
Could the Commission
recommend changes to the student loan programs to increase student aid, without
hurting students?
Yes. By eliminating
excessive subsidies to private lenders, the federal government could free
up new resources for need-based aid. The Commission should recommend the passage
of the Student Aid Reward Act, legislation that would create $10 billion in
new student aid at no cost to taxpayers.
Through the first 10 months
of the Commission's work, no recommendations were made, nor substantial focus
placed, on the programmatic mechanics of federal student loans. The sudden appearance
of such an anti-student and pro-lender proposal raises broader questions about
the drafting of this report and the influence of private lenders.
The Commission should be
looking into opportunities for efficiency in the student loan programs, not
trying to kick millions of students out of the federal student loan programs.
The Commission's report
can be found at: http://www.ed.gov/about/bdscomm/list/hiedfuture/reports/0803-draft.pdf
