Student Loan News January 2006

There have been several developments affecting student loans in the news recently. The first has to do with the ongoing battle between private lenders and student loans available from the federal government. The second bit of news has to do with a recent ruling by the Supreme Court involving the payback of student loans.

Student Loan Ruling by the Supreme Court

Back in early December, the Supreme Court ruled the government can seize Social Security benefits and use that money to pay back student loans. That means the federal government can now collect what's due on student loans through both Social Security and disability checks.

Background on this Ruling

According to the Bush Administration, there are about $33 billion in outstanding student loans in the United States. Of that amount, roughly $7 billion of those loans are in some way delinquent. The ruling gives the government the right to withhold Social Security benefits in order to collect some of the $5.7 billion in student debt that is more than 10 years old.

All students receiving student loans go through a series of counseling sessions to make it clear they have an obligation to pay back the loan. The first counseling session is conducted after they receive their first loan. At graduation, there's another counseling session that reminds students of their responsibility to pay back their student loans.

Our Opinion on the Supreme Court Ruling

Any student that takes money from the federal government is smart enough to understand they have a responsibility to pay back the loan. Any student accepting a loan that does not expect to pay it back is simply committing fraud.

While we are not advocating any kind of hardship on the needy, certainly a college education should provide a student with the means of securing a higher paying job, which can help pay back these loans. The government has a right to expect all students asking for a college loan to repay the amount owed in-full.

Variable Rates on Student Loans

A vote on House Resolution 609, which is a provision of the Budget Reconciliation Bill, has been stalled because the larger bill failed to gain enough votes. HR 609 renews the variable interest rate on student loans, which is set to expire on July 1, 2006.

If HR 609 does not go through, the variable interest rate on student loans would be raised from 4.7% to 6.8%, and would remain static during the year. The bill would also cut approximately $8.7 billion in federal funds to the student loan program.

Background on HR 609

The Center for Economic and Policy Research tells us that nearly two-thirds of today's students at four-year public colleges and universities will take out a loan. The average debt at graduation is $17,600 for students attending public institutions, and $22,581 for students attending private colleges.

Student aid associations and private lenders oppose the bill on the grounds that it would raise the cost of a college education. Estimates indicate the bill would cost a student nearly $6,000 in additional payments over the term of their loan.

On the other hand, this program continues to provide loan guarantees to private lenders dating back to 1965. It was originally designed to ensure that students with little credit or assets could borrow money for college. Within this program, the U.S. Department of Education offers private lenders a guaranteed rate of return on their loans. The DOE also promises to cover 98% of their losses in the event a borrower goes into default on the loan, thereby greatly reducing the risk of default.

Our Opinion on HR 609

HR 609 is an example of the influence of special interest groups at its best. Some politicians are trying to paint a picture this is going to cost students more money. We've already discussed this problem at length in our article Student Loan Loophole. As written, this legislation allows private lenders to make above-market profits at the taxpayer's expense. Corporations like Sallie Mae get hurt because more loans would be written directly by the federal government.

The story you're not hearing is that some politicians want to cut this subsidy to private lenders, return some of the savings to taxpayers, and use some of the savings to write more student loans. That's the right thing to do. Let's hope all of those representing us in Congress do what's best for the future leaders of America.

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