A Government and Private Sector Conflict

Over the last few months, Big Student Loan has been under fire. Almost simultaneously two big guns aimed their sights on the industry: first, New York Attorney General Andrew Cuomo in February, launched further inquiry into the alleged improper goings-on between some college financial aid administrators and student loan lenders. Innuendo had continued to swirl for some time alleging paybacks, stock options, and pay for inclusion deals for the infamous preferred lender lists published by schools.

Also in February, Senator Ted Kennedy had amassed reports of similar near scandals thick enough to make a novel. His solution? Write a bill—the Student Loan Sunshine Act—that could federally regulate the lender-school relationship, now clearly spun out of control.

Senate Cuts Deep Into Big Student Loan

Late Thursday, the Senate voted 78-18 to a slew of new cutbacks aimed at Big Student Loan, almost as punishment for the last few months of bad press and just plain bad business. Senators voted to make repayment of federal student loans forgivable for “public service employees,” like law enforcement and public school teachers, and to raise the amount for Pell Grant recipients up to “$5100 by next year, and $5400 by 2011,” read a New York Times article (“Senate Approves Major Overhaul of the Federal Student Aid Program,” Schemo). The major change most consumers will see is a reduction in their student loan interest rates over the next few years, and the FFELP lenders will likely feel the sting of sweeping profit cuts, the subsidies they earn from the feds. Seems that most Senators (and their constituents) think that enough is enough.

The few critics in the crowd argued that these newest reforms were a cleverly disguised ploy to undo the Federal Family Education Loan Program (FFELP). Senator Kennedy applauded the moves, arguing that students and parents have been increasingly burdened with the high cost of continually inflated tuition and costly student loan repayments, including the FFELs.

Colleges That Choose Affordability Over Money-Making

Well outside the political sphere other developments of a student loan variety also took shape. New England’s prestigious, Amherst College, officially did away with institutional student loans and replaced them, 100%, with scholarships. The move is a measured step by AC to make their education more affordable for all students. Only two other schools, reported the Boston Herald, have taken such bold steps–Princeton University and Davidson College.

College costs have outdistance inflation by nearly 40% over the past 5 years. While government has been subsidizing education, many of these subsidies have been going to loan corporations like Sallie Mae, not students.

A new bill that was approved in the House of Representitives and is headed for the Senate may slash government subsidies to lenders by as much as $18.3 billion. To offset this drop they are also increasing Pell grants for students by over $500 over the next for years. The NYT reports on the changes

As well as cutting lender subsidies, the bill reduces the share the government would guarantee in the event of student default. It halves the interest rate on federally backed loans gradually over the next five years, to 3.4 percent from 6.8 percent, and would limit monthly payments to 15 percent of the borrower’s discretionary income.

The bill raises the maximum Pell grants by $500 over the next four years, to a total of $5,200 by 2011. It also grants $5,000 in loan forgiveness for police, firefighters, prosecutors and other public servants, and a complete release from student loans for public servants after 10 years. It would also provide for complete forgiveness of federal student loans after 20 years for economic hardship.

In that article they also said that the smaller student loan providers are likely to be hardest hit. That is not for the least of reasons because they can’t compete with equal marketing budget, and at as many as 800 US colleges the top loan provider offered over 70% of the student loans. Andrew Cuomo has been investigating some of those backdoor deals at Sallie Mae, Nelnet Inc., Education Finance Partners Inc., EduCap Inc., the College Board, and CIT Group Inc. for many months.

According to Cuomo, investigators found:

• Lenders pay kickbacks to schools based on a percentage of the loans directed to the lenders.
• Lenders foot the bills for all-expense-paid trips for financial aid officers to posh resorts and exotic locations. They also provide schools with other benefits like computer systems and put representatives from schools on their advisory boards to curry favor.
• Loan companies set up funds and credit lines for schools to use in exchange for putting the lenders on their preferred lender lists and offer large payments to schools to drop out of the direct federal loan program so that the lenders get more business.

Students: it Just Won’t Stop

State college tuitions are going up. So scream a disturbing number of news headlines. In Tennessee, the state community college system is boosting the tuition by a little over $130 dollars per person. Last year tuition within the state was raised, too, about 4 percent, in contrast to this newest increase of 6 percent. What are the major reasons for the hike? To “expand enrollment and educate more Tennesseans.” Are that many more students actually being educated, and at what price? The price is about 94 percent higher than it was just half a dozen years ago, argue residents. This shocking up-shot in state tuition is markedly out of step with workers’ wages and other quality of life metrics.

In Michigan, lawmakers have yet to balance their budget and right now it looks as though tuition will again go up. Governor Granholm rallies against the potential tuition crisis; she measures it against her term so far—it’s gone up “37-percent since she took office.”

New Hampshire is kicking up state college tuition, as well. Surprisingly enough, though, the biggest increase is being leveled at in-state students. State residents will pay 7 percent more for their state college education in 2008. Out of state students will only pay 5.2 percent more for their education. What do NH lawmakers contend are the primary reasons? First, money asked for from the government never panned out; a bigger state investment in low-income students has cost big; and then there are heady operating costs (maintenance, fuel for heating and cooling, and construction and repair materials).

Oklahoma is facing its own state tuition hike of over 8 percent (!). Critics of the hikes have leveled criticism at the state board of regents, which now governs the state higher education system. Some critics of the agency, claim things were better when the state legislature made the decisions.

While some of these tuition rises are typical, some critics fear the loss of middle-income students at state colleges, or an even bigger debt problem for new grads. Connecticut Governor, Jodi Rell, recently made a tough political decision—to deny state tuition to illegal immigrants. This move, a controversial one among Hispanic constituents, nevertheless was made with legal state residents in mind. Handing out discounted tuition to illegal students could cost the state millions, and in turn drive the cost of an affordable education too far afield for the average state resident.

To Do List: Get a 529 Savings Account

With all this talk about tuition hikes and no end in sight, maybe it’s advisable to renew chatter about the advantages to state-managed 529 College Savings Plans. These pre-tax savings accounts feature some very attractive incentives in over half the states that offer them. North Dakota just joined the ranks of those governments that will kick in $300 grants for low-income residents that open up 529 accounts.

Start saving early—who knows where states’ tuition could be in another decade or so. Click through the associated section of our site if you would like to find background information about your state’s scholarship, grant, and loan programs.