Just a few weeks ago, President Barack Obama signed into law an overhaul of the college student loan program known as the Student Aid and Fiscal Responsibility Act (SAFRA), incorporated into the Health Care and Education Reconciliation Act of 2010. This legislation fundamentally changes the way the federal student loan industry works–commercial banking lenders no longer act as the intermediaries of federal student loans. Instead, students will now contract loans directly with the government. While there may be cries of socialism and job loss, the effects of this overhaul will directly benefit both the taxpayer and the college student.
The student loan industry has been averse to change because the government subsidy program has provided banks with a lucrative and ever-growing source of income. The government subsidized the banks to act as middlemen for students seeking federal loans. Federal insurance guaranteed that banks would offer low interest rate loans to students with no credit history. The result of this, however, was that the banks made substantial profits on interest, while the government would end up paying for 97 percent of loan defaults.
With the new legislation, the government has cut out the middlemen in order remedy this inefficient and costly system. The White House projects that this law will save taxpayers 68 billion dollars over the next decade. In response, the banking industry may moan and groan about lost jobs. The processing of loans and payment collection, however, will still be handled through banks, which should mean that overall job loss will be relatively low.
As students, we may wonder how this will affect us directly. For the most part, the law works to change the education environment and not the individual student. Loan options will remain similar to those at the present, but college graduates will have a cap on annual loan repayments at 10 percent of their current income. This will help alleviate the immediate financial burden for students who have just graduated and entered the job market.
One of the most important aspects of SAFRA is that the money saved through the bill will be specifically allocated for deficit reduction and education spending. In the area of education, the government plans to use the funds to increase the number of Pell Grants offered each year, found new community colleges and contribute 2.55 billion dollars to historically African-American colleges and universities.
As Stanford students, the loan process will be simpler and easier. Only one lender, the Department of Education, will exist. This streamlines the process and also alleviates some of the difficulties in Stanford’s loan process. The economy forced the University to consider direct lending through the University. While this will still be available, the new government-run loan program will ensure that students receive the loans they need.
The fundamental change in the student loan law brings about a much-needed philosophical change for the student loan industry. No longer will banks profit off of students in need of loans. These loans will not only help facilitate the education of current and future students, but will save every taxpayer money as well. Cutting out the middleman in the student loan industry may not appear to empower the student in a new way; nonetheless, it does empower the government to create a stronger higher education environment while continuing to protect those with student loans. SAFRA takes key steps to change one facet of our nation’s higher education system that required an update. Hopefully, further reform will continue to alleviate some of the difficulties for those seeking higher education.