TheStreet.com Contributor 11/14/2005 7:00 AM EST
If you still have outstanding student loans, Congress is about to sock you with much higher interest rates as part of a plan to close the budget deficit gap.
Several proposals now before the House and Senate tinker with the formulas for calculating student loan interest, and with graduates' ability to refinance their loans and lock in current low rates. If you take action now, you may be able to escape this irrational punishment. And you might want to contact your legislators to protest. But first you must understand the process.
Last week I gave you tips on refinancing your mortgage. If rates come down, you can refinance again. But college students and grads that hold $300 billion of outstanding student loans don't get that same privilege of refinancing at lower rates. Until recently, you could only consolidate your student loans once in your lifetime to lock in a fixed rate. That meant many grads who consolidated five or six years ago were stuck paying rates as high as 9% for the life of their loan.
Rates on student loans change yearly, based on the rate of 91-day Treasury bills set at the last weekly auction in May. New rates go into effect each July 1. Students who consolidate their loans within six months of graduation get an extra rate break. Many lenders even cut rates an extra quarter of a percent if you agree to have loan payments made by automatic deduction from your checking account.
The bottom line: Students who consolidated their loans by June 30 of this year locked in rates as low as 2.875% for the life of their loan. The current consolidation rate is 4.75%. As the general level of interest rates dropped in recent years, many students elected to use their one-time consolidation opportunity to lock in the low rates. But those who consolidated in previous years were stuck paying those higher rates from the time they consolidated.
Then, last January, the Department of Education ruled that graduates could sidestep existing laws against reconsolidation by moving their loans into the Department of Education's Direct Consolidation program. That done, they could reconsolidate again with a private lender offering better terms. Under current law, that's the only way to get a second chance at a low-rate consolidation. And thousands of savvy borrowers are doing just that.
Now, if legislation proposed by the House of Representatives passes, that opportunity will disappear. If the House bill passes, the vast majority of borrowers, who have already "refinanced" or "consolidated" student loans one time will never be able to do so again.
Not only is that a rotten deal, but the House is in the process of making it worse. New legislation proposed by the House would prohibit students who are in school from locking in their current rate of 4.75%. Instead, the rate would jump to 6.3% for this year's graduates, then to 7.9% for those graduating after this coming June.
A bill now pending in the Senate has similar, but less onerous, changes proposed. While the Senate bill would raise rates for new Stafford loans to 6.8% beginning next July, it doesn't prohibit in-school consolidation or charge the much higher consolidation rates that the House bill proposes. Instead, it continues to allow borrowers to consolidate at the weighted average of their current loans.
It was only last May that the Department of Education ruled that borrowers need not wait for graduation to consolidate. And thousands of current students immediately stepped forward to lock in last year's rates, which were the lowest in history. Unfortunately, not everyone found out about this break, and millions didn't take advantage of it. Now, if pending legislation passes, they'll miss a great opportunity.
Interest rates are on the rise, and the rates set in July are likely to be higher. Ordinarily, I'd wait until springtime to bring up the subject of student loan consolidation. But, given the pending legislation, I am recommending that all students -- even those still in school -- move to immediately consolidate their existing loans at today's low rate of 4.75%. Of course, current students will have to pay next year's rates on subsequent loans -- and may ultimately want to consolidate those loans. But consolidating at current rates on whatever loans you already have could save you a small fortune in interest.
Just at the time when our country needs college graduates to keep up with technology changes in this competitive world, we're punishing students who borrow to finance their education. Why? In two simple words: money and politics. With over $300 billion in student loans outstanding, there's big money to be made by the relatively few lenders who dominate the market for student loans.
In fact, for years a quasi-governmental organization called Sallie Mae (Student Loan Marketing Association) dominated the entire market. Awhile back, the organization dropped its federal charter and morphed into a non-governmental, profit-making company that still uses the Sallie Mae nickname but is now officially SLM Corp (SLM:NYSE - commentary - research - Cramer's Take). It controls so much of the student loan market -- nearly 25% of loans outstanding -- that in 2004 SLM was among the most profitable companies in the country.
Profit isn't a dirty word in this column. But these lenders get a guarantee against default on 98% of the student loan balance, as well as a guaranteed yield of 2.34% over the commercial paper rate on consolidation loans. That and other yield guarantees on in-school loans, have resulted in a net profit of over 1% of loan volume. You do the math. On a portfolio of nearly $100 billion, that's over $1 billion in profit!
Now SLM -- the old "Sallie Mae" -- is strongly behind the current proposals to make it more difficult and expensive for students and graduates to refinance the loans that Sallie Mae and big banks currently hold. If you're a student, graduate, or parent, it's time to make your voice heard as the proposals are currently before Congress. Making a college education more expensive is no way to solve our nation's global competitive problems. And that's The Savage Truth.
Student loans to get more expensive
Congress will cut billions of dollars from aid programs to try to balance the federal budget
By Julia Heming, Daily Staff Reporter
December 02, 2005
The U.S. House of Representatives has approved a budget bill that will cut $14 billion in federal student financial aid, while the Senate approved one that would cut $9 billion from aid programs.
Now the two houses are working together to compromise on a combined bill, but regardless of the outcome, federal student aid is expected to suffer.
In an attempt to reverse some of the federal deficit, Congress has been looking at ways to reduce spending on programs such as Medicaid, food stamps and student financial aid. In order to cut back on financial aid, both the House and Senate have proposed higher interest rates on student loans over the next five years. Increasing interest rates on student loans saves money for the government because it decreases the need for federal subsidization of financial aid loan programs.
Students lobbying against such cuts are calling Congress’s efforts to trim the budget a “raid on student aid” and have criticized representatives, focusing on U.S. Rep. Joe Schwarz (R-Battle Creek) — an alumnus with close ties to the University — for supporting a bill that makes student loans more expensive.
Schwarz, who is the chairman of the University’s alumni association and a moderate Republican, said despite his vote for the bill, he did not agree with the clauses on financial aid.
He added that he thinks many people are overreacting to the changes.
“Even if what was stipulated in the (House) bill passes, I don’t think students will see virtually any change in availability of loans, or in the cost,” Schwarz said.
But Tom Kiley, spokesman for Congressman George Miller (D-Calif.), the senior Democrat on the House Education Committee said the cuts would directly and significantly hurt students. Student-loan interest rates would go up, work-study programs would be frozen, the minimum Pell Grant would remain stagnant and the loan consolidation process would be made more difficult, he said.
Schwarz said when combined and finalized, the two bills would result in a better deal for college aid.
“The final product is still being negotiated,” Schwartz said. “In the end, I don’t think the concern over increased cost for student loans is going to be a real one.”
University spokeswoman Julie Peterson said the Senate version of the bill is more beneficial to students because of the grant programs it creates for low-income students. While the House bill uses all of the $14.3 billion in saving to roll back the deficit, the Senate bill only uses about half of the savings to create three new grant programs. Peterson said the University will lobby for more aid.
“We’re always advocating for anything that would increase students’ financial aid,” Peterson said.
Schwartz said the change was not a decrease for financial aid, but would reverse previous commitments to increase aid.
“That’s the whole concept,” Schwarz said. “It doesn’t really cut spending; it minimally limits spending growth.”
Public Interest Research Group spokesman Luke Swarthout said the cuts would be detrimental to students, making higher education less accessible to students of lower income levels. He said students would lose money in high interest rates because the House bill would no longer allow for students to lock into a low rate by consolidating their loans while they are still in school.
“Students across the country are already in a deep financial hole, and this bill will make that hole deeper and could affect the decisions of students debating whether to attend college and assume that financial risk,” Swarthout said.
Passing of the legislation was a struggle, particularly in the House, where the bill passed with a margin of only two votes. With no support from House Democrats, the debate came down to the moderate Republicans and their views toward the threatened social programs.
This is the first time that a budget reconciliation process has been used since 1997.
If no agreement is reached between the two bodies of Congress, spending levels would remain at the current level.
— Margaret Havemann contributed to this report
Congress has been battling over how much to cut student loan programs, but another aspect of this debate has been largely overlooked.The move prevents students and former students from refinancing their loans whenever interest rates decline. That's unduly punitive. The magnitude of the proposed cuts in student-loan programs – $14.3 billion in the House, $8.8 billion in the Senate – is unjustified, as well.The cuts are being touted as necessary to rein in government spending and keep the budget deficits under control. The student-loan programs would take a huge hit. They now amount to $37 billion.The House is said to favor making permanent a provision in current law that prohibits borrowers from renegotiating interest rates more than once in the lifetime of a loan. That contrasts with the flurry of refinancing whenever mortgage interest rates decline.Back when Sallie Mae, a major education finance company, was a quasi-public agency, this provision made sense. But Sallie Mae now is in the private marketplace, and by some estimates, is enjoying profits of $1 billion a year.At some point, though – sooner rather than later – Sallie Mae must be required to play by the rules of the private marketplace.Times Union,
Fight looms over student loan cuts
Senate takes up bill to slash $12.7 billion from education aid
By Susan Milligan and Rick Klein, Globe Staff | December 21, 2005
WASHINGTON -- A bill that would slash student loan funding by record levels is headed for a showdown today in the Senate, where lawmakers are closely divided over whether to cut $12.7 billion in education aid along with $13.3 billion in cuts to Medicare, Medicaid, and children's health insurance before leaving town for the holidays.
The bill would cut the amount of loan money guaranteed by the federal government, pushing up interest rates. It would also impose a 1 percent insurance fee on student loans. Proponents said the changes would control federal spending and help chip away at the federal budget deficit.
But critics said the cuts would overly burden students, who already borrow an average of $18,000 to finance their college educations. The United States Student Association estimates that the changes will add several thousand dollars in interest payments to student bills.
''This bill abandons the government's longtime commitment to ensuring that the neediest students get the most help," said Senator Edward M. Kennedy, Democrat of Massachusetts. ''It imposes so many hurdles to new aid that it is sure to leave behind those who need our help the most to stay in school."
With many lawmakers balking at deep cuts in social spending on the eve of an election year, Senate Republican leaders delayed a vote yesterday on the budget package until at least today.
The possibility of a 50-50 tie loomed, and Vice President Dick Cheney yesterday cut short his Middle East trip so he could be available to cast a tie-breaking vote. On the Democratic side, Senator Christopher J. Dodd of Connecticut raced back to Washington last night, three weeks after undergoing knee-replacement surgery.
A version of the budget bill passed the Senate 52 to 47 last month, but several senators have switched their votes because of subsequent changes in the bill.
With five of the Senate's 55 Republicans indicating they would vote no, both sides said a tie appeared possible, meaning Cheney would cast the deciding vote in favor of the budget cuts. Senate Budget Committee chairman Judd Gregg, Republican of New Hampshire, predicted that the measure would pass, but neither side was sure of the votes late yesterday. Adding to the frenzied atmosphere in the Capitol, a highly anticipated vote is expected today on drilling in the Alaska wilderness. In addition, a partisan standoff has left key provisions of the Patriot Act in danger of expiring at the end of the year, with both sides pointing fingers about who's to blame. ''It all hits the fan tomorrow," Senator Gordon Smith, Republican of Oregon, said yesterday. Smith is opposing the budget cuts in addition to drilling in the Arctic National Wildlife Refuge.
The budget package would net nearly $40 billion over five years in savings to the budget, although Democrats said the savings would be erased by a tax-cutting package planned for a vote early next year.
Some $10 billion would be raised by auctioning off permits for wireless television, while an additional $3.6 billion would be collected by the government through increases in fees paid by employers for federal pension insurance.
The biggest legislative battle has been over the proposed cuts to health and education, with Democrats and a handful of Republicans arguing that the budget should not be cut in ways that harm the nation's elderly and poor while making it harder for students to put themselves through school.
The measure was approved by the House early Monday morning, and lawmakers there said they had little chance to read the bill before being forced to vote on it.
''You're going to make every middle-class family in America have to pay more to get their kids through college, so you can fatten up somebody who is doing historically well," said Representative John Tierney, a Salem Democrat who serves on the House Education and Workforce Committee.
Senator Ben Nelson, a Nebraska Democrat who had previously supported the budget-cutting package, said yesterday he had changed his mind because the current bill would pass health and education costs to the states. ''This is no way to balance a budget," Nelson said.
Republicans said the cuts represent modest attempts to rein in spending on federal entitlement programs, which are contributing to record budget deficits.
''It's really a simple question -- pay now or charge it to your grandchildren," said Senator Tom Coburn, Republican of Oklahoma and the chamber's most vocal advocate for lower federal spending. ''We were sent here to make the hard choices. This bill is a start. It should go much further."
The bill would impose the greatest single cut in history to higher education by restructuring student loans. Currently, the federal government guarantees student loans, allowing lenders to offer lower rates.
But under the bill before the Senate, lenders would have to give the federal government back a portion of the interest they collect from borrowers, meaning the money could not be used to subsidize new loans.
Student borrowers would be forced to pay a fixed rate of 6.8 percent on loans, and parents would have an interest rate cap of 8.5 percent, up from 7.9 percent. Further, Pell Grants would remain capped at $4,050 per student per year, despite earlier promises by the Bush administration to raise the cap to $5,100.
Gregg, the budget committee chairman, said that despite the cuts, the restructuring of the student-loan program would earmark $3.75 billion for a new program to help students who study math and science. The bill also would set aside $1.9 billion to forgive the student loans of special-education teachers, and of students who serve in the military after college.
© Copyright 2005 The New York Times Company
