New bill allows access to more student loan money

Written by: Elizabeth Ballinger
New legislation may enable more students to have expanded access to unsubsidized student loans. After reports over the last year that several small banks have begun limiting participation in new federal student loans due to declining liquid resources to back up funding, the U.S Department of Education has developed a new plan, the “Ensuring Continued Access to Student Loans Act of 2008” (ECASLA). “We want students to be able to concentrate on their studies”, said U.S Secretary of Education, Margaret Spellings, in a recent press release, “rather than worry about disruptions in the student loan market and whether they will be able to obtain federal loans to help pay for school.” Several members of congress have raised issues over increasing lender selectivity with private companies denying student funds based on school, program length, and student income. After Wells Fargo announced its withdrawal from the Federal Family Education Loan Program (FFELP), the government’s unsubsidized loan program, at Eckerd College in St. Petersburg, FLA, the school’s financial aid director commented, “Banks are not philanthropic agencies.” Community colleges, according to an article in the New York Times, have experienced more lender-withdrawal than four-year institutions, based on minimal expected interest return of their comparatively low tuitions. The current bill, signed by the President on May 7, will attempt to counter lender non-participation by creating a temporary program of government incentive for lending companies for the 2008-2009 school year. Banks and lenders who agree to continue originating FFELP loans will be given the option at the end of the year to sell the loan directly to the government. The goal is to encourage the private market to raise capital through student loans, with the assurance that funds will be replenished when the government purchases the loan. Some financial aid officials worry, however, that origination fees and possible future requirements for “guaranteed lending” to students will prove too costly to private lending companies, who may fear that government purchase and interest assistance may not be enough to level company debt. However, legislators hope that the program will encourage lender participation and will effectively protect students from being turned down. Senior advisor Robert Moran commented in a letter to school administrators that a few companies who had previously indicated they would withdraw from FFELP responded to the bill by indicating they would continue to participate. Because the new bill aims to prevent students from being denied unsubsidized loans, the most commonly borrowed student fund, education officials hope it will keep them from being forced to apply for costly private loans (loans which have no direct government involvement or controlled low interest rates). Currently student loans, both subsidized (loans whose interest government-paid during student’s time at college, and for six months after) and unsubsidized, are set at a 6% interest rate. Private loans can range up to 20% annual percentage rate or more. The legislation will also increase the maximum funds students can borrow; for example, raising the freshman limit in some cases from $3,500 to $5,500. Parent-initiated student loans are expected to experience increased maximum funding and availability, allowing parents with certain kinds of bad credit, such as unpaid medical bills, to be exceptions to normal loan eligibility requirements. The current “short-term liquidity” program of government loan purchase is expected to raise $450 in government funds, which will then be funneled into government grants and the SMART scholarship program. The Department has indicated the program will not, however, sustain itself by any additional cost for tax-payers. Massachusetts Senator Edward Kennedy, chairman of the senate committee on education, commented through a spokesperson that the most viable option for community colleges is to enroll in direct-loan programs and eliminate federal guaranteed private loan arrangements. One of the key parts of the ECASLA bill addresses expanding direct-loan program capacity and increasing college access to the program. Currently, BCC offers Stafford Loans that are both subsidized and unsubsidized, but does not offer a direct loan program. According to Bridget Baker, Assistant Financial Aid Director, BCC’s financial aid office is looking into enrollment in direct-loan. The Department of Education promises to intensify research into longer-term, more capitalistic solutions to student loan security as another main point of the new plan. Legislators indicate the best solutions to look for during the next year and after will be those, which implement private/public partnerships to create free market growth using student loan capital. Regarding the impact of current attention to student loans, Spellings noted the timeliness of the legislation. “We can …consider this a teachable moment that speaks to broader, long-term flaws in our complex and outdated financial system.” “This system has been crying out for reform for years, and especially in light of the ever-increasing cost [of] higher education, students and families are counting on us to provide it.” For more information please visit