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Obama fulfills promise to reform student loans

March 25th, 2010

With the reconciliation health care reform bill passed, a supplementary piece of legislation added to it will provide reform to the student loan program. This student loan reform will drastically change the role of banks as well as the role of the government in providing student loans.

At the heart of this legislation, approximately $36 billion will be directed over the next 10 years to finance Pell grants. Pell grants are part of a federal program designed to provide funding to promote undergraduate and post-baccalaureate education on the basis of financial need. Students can then take these grants and select one of 5,400 different participating institutions to seek academic enrichment.

The passage of this bill will essentially minimize the role of private lenders, who currently receive payment if students default on loans. Instead, students in need can look to the federal government for direct loans that are designed to keep rates down. To determine the rates of these loans, “the government will look to the private market for guidance,” said Linsday Calkins, a professor of economics at John Carroll University. “But it also depends on what their objectives are. If they want more people to go to college, then they’ll charge a lower interest rate,” said Calkins.

“At the same time, that could result in more defaults, which would cost the government more money,” she said.

Those like Rep. George Miller of California, chairman of the House Education and Labor Committee, asserted positive sentiments alluding to the potential for America to keep jobs in the country. He also noted that the legislation will better prepare the nation’s youth to contribute to a global economy.

Although those in favor, such as Secretary of Education Arne Duncan, view this  legislation as significant reform for middle and working class Americans to obtain the means necessary to fund a higher education, those opposed view it as superfluous.

Some estimates calculate that the United States taxpayers will save $60 billion over the next 10 years by cutting out these lenders, who had been profiting off of the old system.

“The banks profited because there was no risk involved in lending to students. Even if students defaulted on the loan, the government would have picked up where the students left off,” said Calkins.

However, critics worry that such a shift will be detrimental to those who work in the banking industry. For instance, the banking community has actively voiced dissent in reference to this legislation arguing against educational savings as a means to cover health care costs. Concerns have been raised about the potential loss of banking jobs and mounting, unprovoked government involvement.

In addition to these hesitations towards student loan reform, funding towards education is also a source of contention. In an original estimate from the Congressional Budget Office, savings were approximated at $87 billion.  This figure is significantly higher than what is available and has resulted in cutbacks from the Student Aid and Fiscal Responsibility Act passed by the House in October.

The consequence of such cuts has eradicated plans to improve graduation rates from community colleges; although, these colleges will still receive some assistance resulting from the legislation.