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The Relationships Between Schools And Lenders Are In Question

Concerns have come to the surface that students are paying too much for loans because of questionable ties between universities and lenders. The public-private partnership has enriched lenders at the expense of students.

An inquiry has proven guilt of the above and has generated nearly $10 million in settlements from lenders and universities and has led to the firing or suspension of many administrators and financial administrators. Also, a top official of the U.S. Education Department has also been suspended.

The investigation found that some lenders gave certain schools all-expense-paid trips, stock options, and other personal gifts to the financial aid administrators. By doing this, these favors helped the lenders secure a place on the colleges “preferred-lender” lists that they would give to the students.

Proposals in Congress now have developed to revamp and create better and stronger programs for our students that are more transparent and hopefully fair for all. Yet, the government has its eye out for itself also.

Fewer Private Lenders

There are more than 3,000 lenders that take part in the federal loan program. The 10 largest lenders account for more than half of the loan originations according to Education Department data.

The number of major lenders has been falling and will drop further if lawmakers back proposals to reduce subsidies. However, the savings from those lower subsidies would be used to increase the Pell grants for low-income students and lower the interest rate on federal student loans.

If all of the government’s cuts do take place, that would mean less competition for those seeking loans. Competition encourages lenders to offer interest-rate discounts and waive origination fees in areas where they can. This is created by retail market competition.

There are even smaller cuts than those that are proposed in the legislative. This could cause lenders to shrink those incentives more for borrowers. The government is aware that an over haul needs to take place in the student loan department, yet it is having a difficult time agreeing on the same areas and topics.

Locally, financial aid administrators are also trying to show that their members are conscientious professionals who do look out for students’ welfare. Statements are being added to their applications and they are encouraged to communicate more in this area.

With these financial aid provisions it would save the federal government an estimated $13 billion over five years. Most of the savings would come from reducing subsidies to lenders, with a smaller amount coming from the increase in parent-loan rates.

The Interest Rate Change

The federal government’s college loan program is getting its biggest makeover in more than a decade and largely in the interest rate area. The interest rate on government guaranteed college loans will switch to fixed from variable.

Congress was responding to students who wanted more predictable loan repayments. The rate on all new Stafford student loans will be fixed at 6.8 percent and the rate on Plus loans, for parents, will be fixed at 8.5.

Unlike fixed-rate home loans, neither Stafford nor Plus loans can be refinanced at a lower rate if interest rates drop. Twenty years of research shows that students overall are better off it they are in variable-rate loans due to the cap. Most students and families are going to pay more as a result of this change.

Will all these changes, along with the switch to fixed rates, be good or bad for student borrowers? It’s a mixed bag for students and not so good for parents. Although the proposed cuts in lender subsidies will save taxpayers money, they could cause lenders to rein in their discounts for the students and their parents.