Is the U.S. Department of Education deliberately trying to undermine a new program created by Congress to encourage students to pursue careers in the public service?
That question came to mind as we reviewed the Education Department's proposed regulations for enacting the Public Service Loan Forgiveness program that Congress created in September as part of the College Cost Reduction and Access Act (CCRA).
Under the program, the federal government will forgive the remaining debt of Direct Student Loan borrowers if they make 120 payments on their loans while holding a low-paying, full-time public service-oriented job. Borrowers with loans through the competing Federal Family Education Loan program can take advantage of this benefit by consolidating their debt into Direct Lending.
The program is a reaction to reports that student loan borrowers are increasingly shying away from pursuing public-service careers, such as teaching and social work, and is designed to provide incentives to get college graduates to enter these fields and reward them for their service.
What do an appendix, plica semilunaris, and student-loan guaranty agency all have in common? They're all vestigial structures whose original purpose is no longer necessary. But unlike the first two examples, guaranty agencies are desperate to show -- despite all evidence to the contrary -- that they are still relevant.
As parts of a system known for its complexity and confusion (the Federal Family Education Loan Program, otherwise known as FFEL), guaranty agencies are the ultimate amorphous entity, branching out into numerous roles that are completely unrelated to their original purposes.
Soon after Congress created the FFEL program in 1965, it authorized the involvement of guaranty agencies (many of which were already in existence in the states), to encourage lenders to offer student loans by providing default insurance. Congress also gave the guarantors important oversight responsibilities, such as ensuring that only eligible students obtain federal loans, and that lenders make a concerted effort to keep delinquent borrowers from defaulting.
While it made sense for guaranty agencies to occupy these roles at a time when technological limitations made it difficult for solely the federal government to oversee FFEL, the program's current setup and recent oversight failures make it clear that guaranty agencies should not be the ones to carry out these functions.
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To celebrate Independence Day, Higher Ed Watch will be going on hiatus next week. But before we go dark, we thought we'd remind you of some important changes coming to federal student aid that will save students money and hopefully eliminate some of the worst abuses that have occurred in the Federal Family Education Loan (FFEL) program in recent years.
Most of these changes are the result of two pieces of legislation enacted in the past year: the College Cost Reduction and Access Act (CCRA) and the Ensuring Continued Access to Student Loans Act of 2008 (which we will refer to as the "bailout bill"). Both contain provisions that go into effect on July 1.
The most substantial changes are to the federal student loan programs and the interest rates charged on these loans.
Under CCRA, the interest rate on subsidized Stafford Loans -- which generally go to students from families making less than $80,000 and accrue no interest for the borrower while in school -- will halve over the next four academic years. As a result, borrowers taking out a subsidized Stafford Loan after July 1 will have a fixed interest rate of 6.0 percent, 0.8 percentage points lower than available today. [Borrowers with unsubsidized federal loans will continue to pay a 6.8 percent fixed rate] In subsequent years, interest rates will drop to 5.6 percent, 4.5 percent, and then 3.4 percent by the 2011-2012 academic year. After that, absent any further Congressional action, rates will return to the previous level of 6.8 percent.
Too many times of late, we have seen mainstream journalists fall for the spin of lenders, who in the wake of the credit crunch have had a vested interest in raising panic levels about the availability of student loans.
That's why it's such a pleasure for us to see good, critical, and insightful reporting on the loan industry receive the recognition it deserves. Case in point: Paul Basken, a senior reporter at The Chronicle of Higher Education, has received a National Press Club award for a revealing piece he wrote last May showing how the revolving door between the Bush Administration and the student loan industry brought great rewards to Sallie Mae and put financially needy students in harm's way. [Disclosure: the author of this post used to work for the Chronicle.]
We wrote about Basken's article last year. But at a time when the student loan scandals of yore are fading fast from memory, we felt that it was important to remind our readers of just what he found. The conflict of interest that he uncovered still exists and needs to be dealt with.
Student loan industry officials have been pushing Congress to revisit cuts it made last fall to subsidies lenders receive for participating in the Federal Family Education Loan (FFEL) program. They cite job losses in the industry as one reason to boost subsidies.
“How do you feel about thousands of hard-working people being laid off?” one advocate for FFEL recently wrote to Higher Ed Watch. “Because that's really the biggest tragedy of the College Cost Reduction and Access Act...FFEL lenders haven't gone away, but thousands of people's jobs have!”
There is no doubt that fewer people are employed in the FFEL industry as a result of both the subsidy cuts and credit market turmoil. But while we are sympathetic to the hardships that these job losses cause individuals and their families, we take issue with the argument that FFEL job losses represent a major public policy problem. In fact, the jobs argument confuses the real problem: the lack of an auction for setting lender subsidies makes it impossible to determine just how many FFEL jobs are actually needed.
Compromise Reached on Major Expansion of G.I. Benefits
Bill Would Prevent Lender Discrimination
New SAT Little Better than the Old One
For a long time we have known that KeyBank has played a leading role in aiding and abetting the efforts of sham for-profit trade schools to scam vulnerable students. What we didn't realize, however, was the integral role that KeyBank played in fueling the growth of Silver State Helicopters, an unlicensed and unaccredited Nevada-based flight-school chain that left its 2,500 students in the lurch when it shut its doors without warning on Super Bowl Sunday and filed for bankruptcy liquidation. Most of these students are now stuck having to repay nearly $70,000 in high-cost private loan debt for training they did not receive.
Thanks to a class-action lawsuit filed by several former Silver State students in California, we recently learned that KeyBank was Silver State's exclusive private student loan provider from 2002 to 2005, a time when the flight-school chain grew by "an astounding 2,786 percent." KeyBank appears to have severed its ties to Silver State in 2005, forcing the flight-school chain to find other lenders to provide private loan funds to its students. As we previously reported, Silver State then forged an exclusive arrangement with the infamous Student Loan Xpress and the Pennsylvania Higher Education Assistance Agency (PHEAA), to make and service the loans.
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Challenging Perceptions of the ‘Model Minority'
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When interest rates on variable rate Stafford loans reset this July to a low 3.61 percent (4.25 percent after the six-month grace period for recent graduates) the consolidation loan market, once robust and competitive, will be a shadow if its former self. There are policy explanations, economic explanations, and of course, political explanations for the change in the consolidation market. And like many things in student loan policy, the story is filled with irony.
Not Many Loans Left to Consolidate
As we pointed out earlier this week, borrowers with variable rate Stafford loans (those originated before July 2006) will be able, as of July 1st, to lock in the new low rate for the lives of their loans by refinancing. However, demand for this option may be low, as few borrowers are likely to have any unconsolidated, variable rate Stafford loans left (consolidation is a one-time option). From 2002 to 2006, interest rates on these loans dropped so low that nearly all borrowers who were eligible at the time to consolidate their loans did so, locking in rates between 2.77 and 5.30 percent. For a brief time, even borrowers still enrolled in school could refinance their loans, though in-school consolidation was discontinued as part of the Higher Education Reconciliation Act of 2005. What’s more, new loans taken out since July 2006 all carry fixed interest rates, removing the main benefit of consolidation.