Credit Crunch Changes: Navigating the Potential New World of Student Loans - By: Marc Hill

The biggest change in student loans since the credit crunch is the disappearance of private loan lenders, with more schools opting for the direct loan program. As private lenders flee the scene, so do the interest rate reduction perks associated with timely payments and co-signers being released from the note after an allotted number of these timely payments have been received. With the administration's desire to eliminate the FFEL (Federal Family Educational Loans) program and incorporate it into the Direct Loan Program, the private sector argues their importance in the lending process as their lobbyist's line up with proposals to service these plans.

Under the FFEL program, these loans were backed by the government for 97% of the value plus the payment of the "cap." With the disappearance of private sector loans and the administration's mantra of not letting a good crisis go to waste, the American taxpayer will now guarantee 100% of these loans by the end of the year which coincides with the administration's desire to merge the FFEL program into the Direct Loan Program.

Considering the FFEL program handled three times the volume that the Direct Loan Program did in fiscal year 2008, in addition to private sector assistance a potentially mind numbing increase in federal employees can be expected to handle the servicing of these loans. When you couple this with the business mindset to government bureaucracy learning curve faced by FFEL participants, a transition of this scope is likely to be less than smooth.

Another potential causality of economic conditions and the administration's desire to swallow the FFEL is the student loan forgiveness program. This program forgives a portion of the educational debt accumulated by students who pursue specified academic disciplines (such as teaching or nursing) after work-related requirements are fulfilled.

With the administrations focus on potentially massive increases in Pell Grants and Perkins loans, expansion of the Direct Loan program coupled with a reduction in funding, some states are ending offers to graduating students in eligible fields or cutting loan repayment benefits in mid stream to active participants.

To make matters worse, the administration's reorganization doesn't even address the real problem. As middle income families struggle with ways to fund a college education, the yearly maximum (Stafford) amount for an undergraduate student who doesn't demonstrate financial need is limited to $5,500 in her first year increasing to only $7,500 in years three thru four. With the yearly cost of a four-year degree program starting at $18,000 and up, this amount falls woefully short.

And with credit tightening, the economy struggling, and the government appetite to spend in lock- step with the desire to increase post-secondary entitlement funding for low income families, a tax increase for America's middle class is just around the corner.

Assisting the less fortunate with funding mirrors the fundamentals of the Pell Grant. By eliminating the FFEL program the administration anticipates substantial savings which would allow them to give the Pell Grant permanent "entitlement status" and increase the maximum award for the period ending June 30, 2010 by $600 to $5,350 (some in congress are pushing for the maximum award to total $13,000 per year). Another $200 dollar increase is scheduled for the following award period, bringing the maximum Pell Grant award total to $5,550.

Although the savings goal is commendable, considering the servicing fees that will be paid to private banks, increases in the DOE's budget to handle the extra workload, congressional churning of previously allocated tax dollars to provide band aids for the next ill - advised spending spree and the complete lack of fiscal restraint displayed on both sides of the aisle, doubts linger as to the achievement of these savings.

However, increasing taxes on America's middle class and limiting the amount of federal loans available to those who do not demonstrate financial need, in essence, leaves these families financially obligated to assist others in their educational pursuits, even as they struggle to fund their own child's college education.

As the Department of Education continues to work on the details, let's hope better ideas are on the horizon.

Copyright (c) 2009 Marc Hill

About the Author

Marc R. Hill founder of Reduce My College Costs, LLC a financial planner by training now works full-time as a publisher and coach to educate families about ways to dramatically cut college costs. Hill publishes a monthly e-newsletter, the "College Savings Tip Sheet." Serious about saving money on college costs? Then visit => http://www.reducemycollegecosts.com

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