How Cuts in Federal Aid Will Affect Students
ROBERT SIEGEL, host:
One of the biggest cuts approved by the Senate today is in student loans. The Senate bill makes changes in the loan program that are projected to bring net savings of $12.7 billion. Stephen Burd writes about student loans for The Chronicle of Higher Education, and he joined us in our studios earlier today in Washington. The biggest part of the savings comes from a reduction of payments that the federal government makes to lenders, and I asked him to explain how that system works.
Mr. STEPHEN BURD (The Chronicle of Higher Education): There are two different major federal loan programs, one which involves private lenders and one in which the government gives out the money itself, and both of them would be affected here. But private lenders are in the bigger program, the larger program. Basically, private lenders give out government-backed loans to students. That means that lenders get considerable amount of subsidies to provide loans to students, who can be big credit risks. And so the government has sweetened the pot by providing them sizable subsidies. In this bill, they do reduce the subsidies to lenders, but not as much as they would have under the previous versions of the bill. And...
SIEGEL: So the sweetened pot is a little bit more sour as a result of this bill.
Mr. BURD: It's a little more sour, but I would predict that no lenders will be leaving the loan program over this bill.
SIEGEL: You think that even with a smaller subsidy from the federal government the lenders will still find it worth their while to lend to students.
Mr. BURD: Definitely. There are always more students who need student loans, and so it's pretty much a win-win business for lenders.
SIEGEL: Now student groups were very much up in arms against these cuts, yes?
Mr. BURD: Yes, they were upset. And the main reason they're upset is because the money that is being saved from lenders is not going back into student aid; it's going to reducing the federal budget deficit. The last several years, there's been a real lag in federal financial aid funding, and so they believe that if you're going to take this money from lenders and from increasing fees on student loans, that the money should go back into grant aid.
SIEGEL: Instead it's helping to reduce the deficit is what you're saying.
Mr. BURD: Instead it's going to the federal budget deficit.
SIEGEL: So what might it mean to a student who is taking out loans, let's say, at a community college? How much might the student be able to borrow, either there or at a four-year college, and how much more might it cost them? What's the change?
Mr. BURD: There are two major benefits, I guess, for students--or there's two major changes that will affect students. One is that they're raising the federal student loan limits. Right now a freshman student could only get 2,625, $2,625.
Mr. BURD: What they would be able to get under the new bill is 3,500, and sophomores would be able to get 4,500, where they previously were getting 3,500. So that's one change. And that's a change that's going to make college officials particularly happy because they feel that students are having a much harder time paying because those limits have been low.
The other major changes is the interest rate is going to a fixed interest rate of 6.8 percent, which, in the immediate right now is going to be an increase in the rates that students pay. Currently, it's about 5.3 percent, so the 6.8 percent is actually higher.
Mr. BURD: However, rates are projected to be going up over in the next several years. And the way the program works now, before these changes go into effect, is that the loan program has a variable rate with a cap of 8.25 percent. So actually, this--over the next several years when the rates go up, this may actually look like a bargain.
SIEGEL: The students didn't like this package of cuts, student organizations, and lenders didn't like a cut in their subsidy, and the colleges and universities obviously didn't like this, either. Who did like it?
Mr. BURD: Basically, only the policy-makers who presented the bills, who came up with the bills. It's not a--lenders, as you said, were not happy with the cuts, even though they were less-severe than originally proposed. Student groups and college groups wanted more money for student financial aid. And so, really, the people who are happy are the policy-makers who drafted the bills because they want to try to reduce the deficit.
SIEGEL: Well, Stephen Burd of The Chronicle of Higher Education, thanks for talking with us about the cuts in student loans.
Mr. BURD: Thank you very much.
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