Student loans have become a fallback for families trying to pay the cost of higher education, which at some private colleges and universities now tops $50,000 a year. The types of loans available fall into three general categories: federally guaranteed loans made by banks and other lenders; federal direct loans made directly by the government; and private loans, which are really the same as any other consumer loan, from banks and other companies.
The interest rate paid by students on both guaranteed loans and direct loans is fixed and is set by Congress. In the case of guaranteed loans, the government pays a subsidy to lenders that make the loans and also guarantees the amounts loaned, almost completely protecting lenders from losses. Private loans usually have worse terms than either type of federal loan and the interest rates on private loans can change over time.
Much more attention is now paid to the student loan business, which provides tens of billions of dollars a year in financing to students and families. In 2007 a series of scandals rocked the industry, as investigations by state attorneys general and by lawmakers in Washington turned up questionable relationships between some college financial aid offices, which could direct students to particular lenders, and loan companies seeking to gain business.
More recently, in 2008, student lending has been shaken by the credit crisis, which threatened to cut off the supply of student loans from private lenders by depriving them of a means of raising fresh capital. Many lenders depended on being able to sell loans they made in order to get money to make new loans, and investors’ interest in buying student loans – along with home loans and all manner of debt – fell dramatically.
On Sept. 17, 2009 the House of Representatives passed legislation that would expand federal aid to college students while ending federal subsidies to private lenders. By shifting to direct federal lending, the Obama administration said it would save more than $80 billion over 10 years, which would go into higher Pell grants for low-income students, new investments in community colleges, early-childhood programs and other education efforts.
Parents of students were delighted with the passage of the legislation, while Republicans and private lenders alike characterized the legislation as an intrusive government takeover that will erode consumer choice – the same arguments raised in opposition to health care reform.