Government Take Over of Student Loan Programs

In 2010, the government took over student loan programs. The private sector banks, reeling under the strain of the recession, cut back in their lending and asked students to pay despite lack of employment. Because many students could not find work and could not make payments, a serious default problem loomed on the horizon.

At the same time, many lawmakers felt the loan program amounted to more of a boon to the banks than to the students. The banks would lend students money at a higher interest rate than many lawmakers believed were fair. The government also guaranteed the student loans, so the banks experienced little risk.department of education

What Loan Programs did the Government Take Over?

The Department of Education assumed control of most of the federal student loan programs. The Health Care and Education Reconciliation Act of 2010 placed Stafford, PLUS and Consolidation loans under the government student aid program. Pell Grants, designed to help poor students finance education, grew as a federal grant program in the same legislation. In effect, the government took over almost 95 percent of the student loans.

The Changes Implemented:

The Obama Administration considered unfair the amount that banks asked students to pay back, and they developed an income based repayment plan. In addition, the Obama Administration put in place debt forgiveness for those who took government jobs or worked for non-profits

How this Affects College Students.

Because of the changes, more college students will be eligible for student loans at a lower rate than banks charged. Just to cite an example, most banks charged 8.5% interest on student loans. Currently, the rate charged by the government is around 3.86%. In addition, while banks reduced the number of student loans available, the government does not limit the number of loans available.

Currently, subsidized Stafford loans defer interest payment until the student finishes a program plus a grace period. For unsubsidized Stafford loans, the student pays the interest immediately, or the interest is added to the principal of the loan to be paid later. In addition, subsidized Stafford loans are available only to students for the length of the program plus another 50 percent, where 50 percent of a four-year program is two years. Unsubsidized loans have no time restrictions.

A Brief Pro and Con

Opponents of a government run student loan program believe the following:

1. Borrowers go into higher default when the government is the lender.
2. The government requires very little to qualify for a loan.
3. The money the government makes from student loans is profit to the government.

Proponents of a government run student loan program believe the following:

1. More loans are available at a cheaper rate.
2. The government will save close to 60 billion dollars over ten years.
3. The student loan program is no longer easy profit for banks.
4. Students can repay the loans easier by basing the share on student income and accelerating loan forgiveness.