As you all know, I work for a student loan company. As we are all knee-deep in industry news on a daily basis, you can imagine my surprise when I heard about this Bill.
Now, at first glance this Bill (H.R. 5) sounds gravy to undergraduates. The benefits to this Bill include an interest rate drop from 6.8% to 3.4% over a four year period as well as an increase in the amount of Pell Grants available. That sounds good right? It will be cheaper to pay for school and there will be more free money available to pay for tuition. Well, not exactly. As you should expect, politicians promote Bills by only informing citizens about the perks.
By now you should be thinking, "What's it going to take to get these perks?" The answer is the breakdown of Capitalism in the Student Loan Industry. Specifically this Bill prevents "banks" from competing with each other. The Bill makes it more expensive for the private lenders to conduct business and this will most certainly hurt borrowers when it's time consolidate. The Direct Loan program that is being promoted through this bill does not offer any benefits for borrowers to consolidate. Private lenders currently hold that competitive advantage over the Direct Loan Program. They are able to offer rate reductions, cash back, and compelling customer service. They compete so that YOU the borrower get the best program out there.
Students are NOT affected while in school only after once they go into repayment. It does not increase the students ability to get student loan funding to pay school. Very few students are fortunate enough to go to college on a full ride scholarship. I personally went to school on two atheletic scholarships as well as an academic college. I went to a private school. Take a guess at what was left over with 85% scholarship. I'll give you a hint; three times more than what I paid for my car. My car is a Saturn Ion 2004.
The Bill ONLY affects the subsidized stafford loan which most middle class students do not qualify for. I know I have very little in subsidized loan debt as compared to my unsubsidized debt. A quick reminder; subsidised means the government makes the interest payments while you are in school and unsubsidized means you are responsible to pay on your own. While 5.5 million students will take advantage of this benefit, how many more aren't affected at all? If they were to increase the amount that students can borrow in Stafford loans by a large percentage wouldn't have to settle on their third choice or even Community College. It's not fair to students who have the mental capabilities to attend an elite school but are not eligible for federal aid because their parents income is above the threshhold. Think of the amount of students that are stuck in that Catch 22 and forced to take out loan after loan.
Consolidation isn't the devil. Considering I have experience in the Mortgage Industry, Consumer Debt/Bankruptcy, and now the Student Loan Industry I am well aware of the benefits to consolidation. Think about it like a refinance on your home. Most consumers are forced into taking high interest mortgages when purchasing their first home becasue their credit has not been established long enough. After signing up for adjustable rates that start low and increase substantially at the end of the term they are able to refinance into a better term and rate once they are out of their pre-payment penalty period. This can save homeowners anywhere to $100 to thousands each month which automatically increases the amount of disposable income for the household. What can that do??? You can pay off other high interest debt faster, open a retirement account, afford better healthcare, and even save for home improvements. The effects of a student loan consolidation mirror those of a refinance. You receive a tax deduction at the end of the year for all interest paid, your payment is lowered, decreased interest rate, lower DTI and more.
I will continue to write information on this subject simply because I know several people who are affected by this bill.
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2 comments:
These politicians have no idea what they are doing. This could be really, really bad for our nation's education system and for busines in general.
I agree. They are trying to be hero's but are actually screwing borrowers out of their benefits and making the students pay for it. Shame shame shame.
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