The Senate Reconciliation bill brings student loan reform

Posted on March 30th, 2010 in Economy,Education,General by Robert Miller

In the same vote that brought us healthcare delayed, the Senate reconciliation bill brought us a new edge of  progressivism,  delayed far too long in the form of a new Federal program governing student loans for college.  Hidden in the healthcare reconciliation bill passed by the Senate last week, the government took over the entire student loan program, eliminating banks and providing projected savings to the government of about $ 87 billion over a ten-year period.  Obama signed the bill into law yesterday, so that beginning July 1, 100% of college loans will be given and administered by the government. There is a slight improvement in the interest rates, from 8.5 to 7.9% over the bank route, though that does not seem like a giant breakthrough opportunity for debt seekers. But, we did it, we nationalized student loans and the persistence of Fire Dog Lake in promoting this bill may have been central to its passage, by use of their sign-up sheet. The savings from this arrangement will be used to fund more Pell grants and allow them to be indexed to inflation for the first time ever.  A shortage of Pell grants in recent years will be fixed by this bill so that 100% of qualified applicants can receive support. Whereas Pell grants used to cover 75% of college expenses in years past, that number is down to 35%, so pegging the program to inflation should help keep the loan program viable for students. In time, about 8 million students are projected to have their college chances significantly improved and avoid dropping out because of insufficient funds.

This bill sailed through the house, but got blocked in the Senate where all good things come to an end. But the clever tactic of including it in the reconciliation process (part of the savings from the new student loan bill will help pay for the new healthcare insurance bill) dropped it into the can-do box under the radar screen.

Student loans began with the Federal Family Education Loan Program, created in 1965. Under Clinton, the Department of Education began its own direct loan program and most schools would sign up for one vs the other (bank vs Fed), not both. At that time, the Federal Government would set the rates and terms. Once at 20% of all student loans, as our economy went south, the percentage of direct Federal loans has grown, now at about 35% and soon to be 100% of all new student loans. Banks can still give loans, but they will not be secured by the Federal Government and will presumably be prohibitive in cost–so be wary!

Loan repayment schedules have been improved. The new bill will limit payments to 10 percent of discretionary income and forgive balances after 20 years. But these changes only apply to loans taken out by new borrowers on or after July 1, 2014. They are not retroactive.

Public-service workers on the income-based repayment plan can have their remaining balances forgiven after 10 years. That’s the same as the old law.

Now the major challenge in front of us, is to make a new economy that provides jobs for college graduates and doesn’t reduce them to competing for the same jobs that high school graduates get in line for. So far there is too much of that going around, especially for an “advanced” “civilized” “modern” society. That is the mother of all assignments for the weekend. How to build a better economy. Here is my first suggestion: any business that is going to be sold by its owners or downsized by a Private Equity firm, is given first opportunity for purchase to the employees, who with government help to secure loans, can assume ownership and try to run the business as a profitable enterprise. Remember that one problem we have is what I call the “Microsoft Problem.” That is too many corporations trying to emulate Microsoft’s unseemly profit margins and as a result, workers pay has stagnated and they did not financially gain as their company productivity went up: savings from that source went into CEO pay and company profit margins to elevate the value of the stock. The golden parachute appeared and the gold watch went in the toilet.   Worker ownership should be less concerned about profits and more concerned about jobs and products. And, we know where the creativity for the place is typically found–yes in the workers. Remember the high financiers of today’s corporate world, understand a leveraged buyout, but don’t know how to make things. Making things is the key to an industrialized society with equitable wealth distribution. Everybody has a skill. We need to get all those Chrisitan militia people back to work as well. They are getting a little scary out in the hinterland.

RFM

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