Obama Administration’s New College Student Loan Proposal

I’m petrified about taking out any student loans for my teenagers.

Okay, petrified might be a bit strong, but as I’ve spent the last few years researching college issues, I’ve learned how rapacious the student loan industry is.

It didn’t used to be that way. The federal student loan effort was launched as a way to help middle-class and lower-income students receive college educations. Long ago, however, the program grew into a phenomenal way for executives and shareholders to enrich themselves. An example: During one five-year period, the former CEO of Sallie Mae, the student lending juggernaut, raked in compensation of $235 million. Here’s a story that will provide some background on student lending practices and will turn your stomach.

Thanks to powerful lobbyists and a compliant Congress, student lenders gained tremendous power over the years while the rights of  student and parent borrowers nearly disappeared.

Under this rigged system, families don’t understand how easy it is to mess up and trigger a cascade of penalties that can make a student loan amount skyrocket.

The Obama administration is trying to change the unconscionable balance of power by refusing to be the student lending industry’s enabler any longer. In Obama’s proposal to dramatically overhaul the federal student loan program, he is advocating replacing federal loans through private lenders with ones that the federal government provides directly. This move could free up more than $94 billion over the next 10 years, which would be plowed into federal Pell Grants for lower income students.

In contrast, here is how the federal-guaranteed loan program currently works: If a student defaults the federal government makes sure the private lender receives almost all its money back and by law the government guarantees that private lenders enjoy a decent rate of return. What this means it that lenders take no risks.

What’s crazy about this arrangement is that the federal government has been giving private lenders subsidies that aren’t necessary. It’s a lot cheaper for the federal government to make direct student loans — and it does — but private lenders have used perks, such as free food, massages, and sporting event tickets, to convince colleges and universities to steer their students to the more expensive outside lender programs. And what do colleges care since it’s the taxpayers who are underwriting it all?

I’ll keep you up to date with what happens with the Obama proposal.

Learn how to protect yourself when borrowing for college by reading The College Solution. And check out my other college blog at CBSMoneyWatch.com.

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