If the Prez really wanted to create an education legacy for his reelection, he would make college free and pay for it by taxing Warren Buffet and Bill Gates at a 96% effective rate. I would vote for that. In the meantime, why are all of the big proposals (Health care, Education) coming out of Congress, but being credited to Obama? Where is the administration's health care plan? Oh, that's right, there isn't one.

Curiously, in mentioning concerns about H.R. 3221, the “Student Aid and Fiscal Responsibility Act,” this blog did not note that the promise of a Pell Grant entitlement has been broken. That is a serious breach of faith that deserves at least a passing mention.

What was more important to Chairman Miller (and apparently to the Obama administration who, we understand, worked hand-in-hand in drafting the bill)? New, multi-billion initiatives that will exacerbate the federal debt and make full funding for Pell Grants in the future less likely to occur.

The truth be told, H.R. 3221 is an embarrassment, starting from is disingenuous title suggesting that over $70 billion in new education benefits is about to be produced as if by magic.

Let’s focus on students. Simply put, if enacted in its present form, H.R. 3221 is “not in the best interests of students.”

Why do we say this? We’ll mention just three reasons.

First, the bill unnecessarily accepts the risk of a failed transition to Direct Loans. What happens if the Department fails to transition 4000 schools into Direct Loans by July 1, 2010? Many students will experience problems getting the funds they need for school. Why not allow some loans to continue to be originated by private sector lenders and then be sold to the Department of Education? This would eliminate the transition risk.

Second, the default aversion role of FFEL guaranty agencies is simply eliminated. Were the default aversion efforts performed by guarantors over the last 44 years a complete waste of taxpayer money (note, actually borrower default fees helped fund these efforts)? The evidence, reflected in default rates, suggests otherwise. We also think borrowers deserve as much help in meeting their mounting loan obligations as possible. The benefit to borrowers of a “second set of eyes and ears” working on delinquent accounts should be obvious, but was overlooked by the authors of H.R. 3221.

Third, the bill eliminates borrower choice. If a loan servicer believes their performance will lead to either more or less business opportunity in the future, they will be more responsive to borrowers. H.R. 3221 instead relies on complicated provisions tucked inside servicing contracts to promote quality in servicing. If choice and competition are good in health care, as President Obama keeps telling us, why not in student loans?

In addition to these three provisions, we share this blogger’s concern about statutorily awarding government contracts to state agencies and not-for-profit servicers in the bill. These provisions do not reflect well on Chairman Miller or on the Department of Education, which apparently has acquiesced in them. If we understand how these provisions would work, the bill would virtually assure that specific non-profit agencies get government contracts, most likely at prices higher than the four recently awarded Direct Loan contracts, and be assigned loans in their State even if the borrower, the school she attends, and the Department of Education believes another servicer could “do it cheaper and better.” That is not borrower friendly.

We could say a lot more about this bill, which will no more save $87 billion (or is it $94 billion) over ten years than it will cure cancer, but suspect your readers are more interesting in more cheerleading from this blogger than in a discussion of issues.

Once again the legislature has taken proposed dramatic action to reform the student loan system. Once again, they have completely failed to address the real problems. In fact, they even apear headed even further in the wrong direction. Someone needs to buy these people a moral compass.
The elimination of standard consumer protections has had a devastating impact on student debt as well as the cost of education.
Eliminating the middle men and making these profits available in the form of Pell grants, at first glance seems noble enough, but let's pause for a dose of reality. Where does the 80-90 billion dollars of "savings" come from ? Is it some sort of mystical manifestation of the land of make believe ? I think not.
The best I can figure is that these billions of dollars continue to be a by product of the billions of dollars in "need based" lending. That is to say, that in most cases, the money "saved" by this program will actually be generated by the same folks in need of the additional Pell grants. This is kind of like, "stealing from Peter to pay Peter."
Pell grants do not even come close to covering the cost of tuition and fees, which leaves most recipients in need of loans.
How about this. We actually fix the problem. Take the profit out of college lending. Restore standard consumer protections which will force the cost of college into a market correction. We may not even need the additional Pell grant money.
Anyway...just a thought.

Dear Stephen Burd,

Something must be done to prevent private student loans from raising interest rates to being equal to some credit card rates. The 2005 Bankruptcy Protection Act is still on the books and it still says that private loans can never be discharged through bankruptcy. Yet, those loans still do not come with the same package of economic related deferments as to government loans. Further, because there is no chance that someone will just walk away from their debt, the banks push the rates to very high levels. This would not be the case if private student loans could be easily discharged.

As T. Boon Pickens says; "High prices cure high prices." If private student loans could easily be discharged in bankruptcy, then two things would happen. First, there would be reluctance to push the rates up because people would just walk away from the loans. Second, there would be every effort on the part of the banks to provide the same economic deferments and repayment programs, as do the government loans.

I understand the argument that private loans are just that, private loans, and private loans need not provide the same flexibility. But if they are private debt, then they should be easily discharged through person financial restructuring. After all, the banks and car companies get to do that. Ithe private student loans get the same unique protection from bankruptcy as do government loans, then they should not get the same level of return as do credit cards and other non-government backed debt instruments. Right now, they have it both ways. They get government protection and a private sector return. The basic economics of that risk reward relationship is flawed. No financial market could ever sustain that fundamentally flawed relationship for a substantial number of years. If the risk is taken away, then they should get a risk free return. If the risk is substantially reduced by government protection, then they should get a return that is substantially below a full risk bearing return.

If the banks get a risk premium, then they should be forced to bear the risk and be left to write down loans during an economic crisis. Keep in mind, the banks that lent these student loans got bailed out from their poor decision making. Why shouldn't the student borrowers get bail outs? But the real problem is that when the banks realized that the real estate loans were going to go under, they started trying to hide the losses by pushing up efforts to collect payments from other forms of debt. Because they needed to make the quarters earning and evade acknowledging the impending credit crisis, they became very uncooperative. Then, the camel's back broke and the banks had to lay off many people and they ended up having to acknowledge the existence of a banking crisis anyway.

If the banks had treated unsecured student loan debt like they would have any other unsecured debt, they would have lent less of it out and written more of it down much sooner than they will end up doing anyway. It quasi government guarantee that came from the 2005 Bankruptcy Protection Act simply said; even if a person could never afford to pay the amount that they owe, the banks will still get pad back. So the banks agreed to lend very large amounts of money that they intended from the very beginning to be paid back by the government. Then the universities began raising the salaries of professors to rival private sector salaries and began paying college presidents 7 digit compensation packages and football coaches a professional athlete's salary. All of this raised the cost of education. Given that the banks felt that the government would back all of the loans, it made better sense to them to lend as much as they possibly could. That is what they did and now the country must find a way out of the problem.

Sincerely,

Sean M. Donahue

This talk I read of "looking out for the students" in some of the comments below are offensive and insulting. If anyone was "looking out for the students", then standard consumer protections, such as bankruptcy rights, statutes of limitations, and a multitude of other protections would have never been taken away from student loans (and ONLY from student loans) in the first place.

Let's face the facts for once: the federal student loan system has become fundamentally predatory due to the Congressional removal of standard consumer protections, combined with congressionally sanctioned collection powers that are stronger than those associated with all other loan instruments in our nation's history. These actions by Congress have, created an inherently predatory, state-sponsored lending and collection system where the motivations of the various functional elements of the system are fatally misdirected- A system that promotes inefficiency in administration, unchecked inflation, bureaucratic malaise and conflicted oversight. Moreover, the resulting system promotes needless and expensive complexity and redundancies, fails to encourage academic excellence, and ultimately, promotes delinquency and default.

While this system has been extremely lucrative for a few individuals, it causes massive harm not only to borrowers and their families, but also to non-borrowing students and their families, due to the dramatic inflation that the system promotes. The nation suffers a massive cost due to the large amount of wealth trapped in this system, the quality of the education received by the citizens, and the public's opportunity cost associated with the materialistic career paths that citizens are forced into at the expense of public interest work, and entrepreneurship.

Make no mistake: this problem exists across both Direct Loan (DL), and Federal Family Education Loan (FFEL) Programs. In the public interest, the consumer protections that were removed by Congress must be restored by Congress at the earliest opportunity. By returning these consumer protections, the motivations of the system's functional elements will be reoriented such that most, if not all of the deficiencies mentioned above will go away over time.

The reason bankruptcy protection was removed from student loans is because of the rash of filings we saw in the 70's and early 80's. No financing system could survive the onslaught of new filings that would ensue under a return to dischargability (esp with Millenials, HELLO, they don't want to be accountable for ANYTHING!). The Direct Loan program would collapse of its own weight if borrowers had the discharge option. Then what? no money for new college-bound students.

"esp with Millenials, HELLO, they don't want to be accountable for ANYTHING!)"

Hello, that is an extreme generalization and therefore obviously untrue, but how would anyone be able to pay a loan that mushroomed the way these loans that are guaranteed to the predatory banks & collection agencies do? Loans that cannot be refinanced, loans that can be paid with social security and disability income, loans that come in as high as 28% interest with banks refusing to even allow borrowers to pay them off in advance?

And where is the next generation of home buyers, car buyers, vacationers, mothers & fathers when they are merely paying usurious rates to a few bankers who are making a killing?
How about a stimulus for the economy by returning some normal protections to these people who just wanted to improve their lifetime job prospects.

Keep in mind, the default is paid by the government, and then the bank goes back to collect it again because this debt cannot be discharged. That bit of larceny is being done by people in the generation ahead of the Millenials, and that's not exactly saintly behavior. Makes me want to find a way out of my own generation.

Something must be done to prevent private student loans from raising interest rates to being equal to some credit card rates. The 2005 Bankruptcy Protection Act is still on the books and it still says that private loans can never be discharged through bankruptcy. Yet, those loans still do not come with the same package of economic related deferments as to government loans. Further, because there is no chance that someone will just walk away from their debt, the banks push the rates to very high levels. This would not be the case if private student loans could be easily discharged.
Best Friends

As T. Boon Pickens says; "High prices cure high prices." If private student loans could easily be discharged in bankruptcy, then two things would happen. First, there would be reluctance to push the rates up because people would just walk away from the loans. Second, there would be every effort on the part of the banks to provide the same economic deferments and repayment programs, as do the government loans.
Branson Area

Something must be done to prevent private student loans from raising interest rates to being equal to some credit card rates. The 2005 Bankruptcy Protection Act is still on the books and it still says that private loans can never be discharged through bankruptcy. Yet, those loans still do not come with the same package of economic related deferments as to government loans. Further, because there is no chance that someone will just walk away from their debt, the banks push the rates to very high levels. This would not be the case if private student loans could be easily discharged.
branson missouri

The reason bankruptcy protection was removed from student loans is because of the rash of filings we saw in the 70's and early 80's. No financing system could survive the onslaught of new filings that would ensue under a return to dischargability (esp with Millenials, HELLO, they don't want to be accountable for ANYTHING!). The Direct Loan program would collapse of its own weight if borrowers had the discharge option. Then what? no money for new college-bound students.
Make Up Store Twin Gloss,Trespass

The reason bankruptcy protection was removed from student loans is because of the rash of filings we saw in the 70's and early 80's. No financing system could survive the onslaught of new filings that would ensue under a return to dischargability (esp with Millenials, HELLO, they don't want to be accountable for ANYTHING!). The Direct Loan program would collapse of its own weight if borrowers had the discharge option. Then what? no money for new college-bound students.
Make Up Store Twin Gloss,Trespass

Hello, that is an extreme generalization and therefore obviously untrue, but how would anyone be able to pay a loan that mushroomed the way these loans that are guaranteed to the predatory banks & collection agencies do?
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