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Grassley Q & A

The Student Loan Program

April 7, 2010
Traer Star-Clipper

By

Senator Charles Grassley

Q: Included in the health care reform reconciliation bill was a major change to the student loan program. What does it do?

Currently, most American college students with Stafford student loans received federally backed loans from the private bank of their choice. Other college students, whose school chose to participate in the government Direct Loan program, received their Stafford student loans directly from the U.S. Department of Education. The interest rate and other terms of the loan for the student are the same for both programs. The difference between the two student loan programs is in how each is run. Under the new law, starting in July, the private run program will cease to exist and all students will receive their federal student loans from the U.S. Department of Education. This will effectively make the U.S. Department of Education one of the nation's largest banks.

Q: Will this change really save $68 billion?

The Congressional Budget Office (CBO) is the budget scorekeeper for Congress. Its official estimate using the methodology required by current law says that the federal government taking over all student loans will generate $68 billion. This isn't simply savings, but it assumes that the federal government will actually make a profit off student loans. These projections are based on the idea that the federal government will be able to borrow money from creditors like China at a low interest rate and then loan it back out to college students at a much higher rate, in effect overcharging students and pocketing the difference. Some of that revenue would go toward new education spending, but almost $9 billion would help pay for the new health care reforms recently signed into law. For instance, the bill partially funds the cost of future Pell Grants, creates a new program to help prepare low income students for college (which seems duplicative of existing federal programs like TRIO), and establishes more generous terms for an existing program that forgives student loans to students who make minimum payments for a certain number of years. The problem lies in the fact that the CBO itself acknowledged that the methodology the office is required to use in making its official cost estimate is incomplete and fails to account for factors like market risk. Using a more complete analysis, the CBO says that the federal government will not make money after all and it will cost the federal government money to operate the student loan program regardless of whether the government or private banks supply the funds. That means that all the new entitlement spending for health care and education that is supposed to be offset with the money the government makes from the student loan program will end up adding to the deficit and the debt.

Q: Will it make college more affordable?

The portion of the new spending that will go toward Pell Grants will help bring down the cost of higher education for some low income students, but most of the other spending will not make it easier for students to pay their tuition bills. If we accept the CBO's official cost estimate that anticipates the government making money off interest payments from college students, which the reconciliation bill does, then we ought to reduce the interest rate we charge students in the first place rather than overcharging all students with student loans. In fact, I voted for an amendment to the reconciliation bill to do just that, but it was defeated.

If Congress is serious about making college more affordable, I've introduced a bill to make permanent law education initiatives I've championed in the last several years, including expanded tax deductibility of interest on student loans, expanded tax-free college savings accounts, creation of the first-ever tax deduction for college tuition, the tax-deductibility of classroom supplies for teachers, a tax exclusion for employer-provided education assistance, and improved tax treatment of bonds for school construction. All together, they've meant about $257 million in savings to Iowans since 2002. I'm also keeping the focus on the need for endowments to use their tax-exempt dollars to make college more affordable.

 
 

 

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