Student loan reform

This is real reform, and was added to the passed health care expansion bill. Well done, Obama and the Dems in Congress. I have no qualms with this (can you believe it!?!), except that it is long overdue. There is absolutely ZERO reason why private banks and Sallie Mae (top lender managing >10M loans) should serve as the middleman between students/colleges and the federal government underwriting the loans, while of course increasing the cost of the loan for their own profits (another "subsidy for the banks"). The industry is huge (total US student debt is $527B) and their cut is not insignificant (~$6B/year), which is why the banks were fighting the reform so much (Sallie Mae alone spent $3M on lobbying/ads). The government will use that money to increase the size and number of Pell grants (need-based college grants) to keep up with inflation, and also support the hurting junior college system that has seen its funding pillaged by cash-strapped states. Since the Clinton administration, a number of direct student loans were available (~23% of all loans, and about 7% CHEAPER than Sallie Mae), and public schools like UC Berkeley have been using them for years. During the Bush presidency, multiple attempts to close that program were made, but fortunately failed. Direct loans have worked at places like UCB, so there's no reason why they can't work nationwide.

Pells used to cover most of a college education, but now that costs have soared almost as much as health care, the $6k/year grant doesn't go very far, but under Obama government spending on Pells has doubled (almost a million more grants will be given out by 2020). As my last email described, college is one of the best ways that poorer immigrants and the lower classes can advance themselves in US society. And if we're excluding talented, motivated people from quality higher education just because of financial hardship, then that impairs our overall economic and social well being.

This education reform demonstrates why we needed the private option in health care, possibly on the road to single-payer. This will keep student loan interest rates down. It's not putting the private lenders out of business (it will of course force them to shrink), but serving as a check against extortion. The direct government loans will offer an APR of 8% for professional schools, versus 12% in the private sector. It's not like banks will go under because they lose that extra 4% on a medical school loan, but now they have to offer competitive rates to earn our business.

Banks counter that customer service will suffer now that a "federal bureaucracy" is servicing loans directly instead of your "friendly community bank". I'm not defending government customer service (try speaking to a human at the IRS), but that's a load of crap. Sallie Mae (SLM) is a for-profit entity, and JP Morgan, Bank of America, and some private equity firms tried and failed to acquire it for $25B in 2007. If SLM is just a friendly lender trying to help our America's students, why would the sharks show so much interest? The same big bank sharks who destroyed the economy with mortgage trading are the ones servicing student loans too. When the credit crisis hit, worthy students couldn't get college loans because the greedy, paranoid banks weren't loaning. Then why are they even involved when they're not fulfilling their function? Republicans (often from states that are home to the HQ's of these banks) criticized the legislation, saying that it will cost thousands of jobs and is actually a clandestine way to help fund the health bill. Well, the first count is true, but so what? Aren't they the ones against subsidizing failing industries like auto (or are they just against union-heavy industries)? The private student loan industry is obsolete and now needs significant retooling. It's a free market and America is the land of opportunity, right? Sink or swim. No one cried when thousands of Lehman and Enron workers found themselves on the street, even though they weren't responsible for the transgressions of their execs.

And as you would expect, like in other credit industries, abuses abound on private student loans. NY sued SLM, Citi, Nelnet, The College Board (the SAT a-holes), and others for deceptive lending practices in 2007, and SLM settled for a $2M donation to a NY student loan information program. There is another class action suit pending against SLM for discrimination against black and Latino customers (charging them higher rates). In 2007 (apparently a very bad year for the industry), scandals abounded across America involving bank reps offering gifts and favors (even stock options!) to college financial aid officers to promote their banks as the "preferred lender" to students, which led to firings for those who were caught. In addition, unlike with other types of loans, the 1965 Higher Education Act allows student loan providers to also handle collection duties. So they have a financial interest to maximize defaults, which in many cases can lead to more money for them than the borrower keeping up with payments. Just your friendly neighborhood lender huh? I don't think the Feds will be that evil. 

http://thecaucus.blogs.nytimes.com/2010/03/30/obama-signs-bill-on-student-loans-health-care/?8au&emc=au
http://en.wikipedia.org/wiki/SLM_Corporation
http://www.thenation.com/doc/20070521/loan_abuse
http://www.kqed.org/epArchive/R201003310900
http://campusprogress.org/tools/788/crib-sheet-direct-loans
http://www.npr.org/templates/story/story.php?storyId=9803210&ft=1&f=1001