On Wednesday, President Obama revealed his budget plan, which includes a major overhaul of the current federal student loan program. The sweeping and controversial plan would completely alter the $85 billion student loan business, which currently profits companies like Sallie Mae to the tune of $4 billion a year.
Here’s how: The way federal Stafford student loans work right now is that private companies, namely Sallie Mae and Citigroup plus a handful of other smaller lenders, receive subsidies from the federal government to originate student loans. The government then sets the allowable interest rate on these loans and guarantees to pay the losses to the lender if a student should go into default on the loans.
According to Obama’s budget team, this subsidy is costing the government over $4 billion a year. Obama wants to do away with the subsidy and instead originate the loans directly from the government. Instead of owing Sallie Mae, you would owe Uncle Sam.
With the savings in subsidies, Obama plans to increase funding for the Pell grant and other federal grants to the neediest students. The size of the current federal loan program would also grow, making more families eligible for loans.
The plan wouldn’t completely cut out private companies, either. The servicing and collecting of loans would still be outsourced, and Sallie Mae indicated on Thursday that it intends to compete for that contract.
To learn more about how this announcement could affect you, here are two great articles on the specifics of the plan:
- Big Changes on the Way in Lending to Students @ The New York Times
- White House Plan Would End Subsidies to Student Lenders @ The Washington Post
Of course, the plan isn’t a done deal yet. Congress would still need to pass legislation to its affect, and according to reports, that won’t be smooth sailing. While most Democrats are enthusiastically supporting Obama’s overhaul ideas, Congressional Republicans have been quick to criticize it for what they call the “socialization” of student loans.
Whether you think the plan is prudent or not, I personally don’t see how it is socialization. Or rather, I don’t see why it is any more socialized when the government loans the money directly than when they subsidize private companies to loan the money. But that’s just my two cents! What do you think of Obama’s plans for federal student loan?