Amendment to end private bank control on loans

DECK: Change expected to save government billions

In a move that will affect many college students, Democrats in the U.S. House Democrats in the U.S. House of Representatives attached a student aid amendment to the health care bill passed last week.

The initiative would allow the U.S. government to run the federal student loan industry, ending the control private banks had on federal student loans for decades. The House amendments must now be approved by the Senate.

Abdur Chowdhury, a professor of economics at Marquette and an expert on the student loan industry, said under the old system, private banks were subsidized by the government for student loans. The banks acted as middle men between the taxpayers’ money and students’ educations, Chowdhury said.

In other words, students currently go to private banks like Sallie Mae, which uses the federal government’s money to administer loans to college students. Private banks are paid a commission fee for administering loans to students, which according to Chowdhury, causes the interest rates to be higher than necessary.

Under the new system, students will go directly to the federal government for loans, which according to Congressman George Miller (D-Calif.), will save the government $61 billion over the next 10 years. That money will be reinvested into Pell Grant scholarships and community colleges, Miller said in a statement.

“It’s time to stop wasting billions of taxpayer dollars to subsidize big banks, and start investing that money directly in our students and families,” said Miller, who authored the legislation.

But not everyone thinks the new student loan regulations will run smoothly.

“The government tends to make things more cumbersome,” Chowdhury said. “Loans will not be as easy because of bureaucratic red tape.”

Chowdhury said there are benefits with the new regulations, such as a decline in costs for students, but it will be years before economists know whether the pros outweigh the cons.

Tim Olsen, spokesman, said the university has been participating in the federal direct lending program since 1995. The university’s administration does not anticipate any problems with the new regulations, Olsen said.

“The savings from the switch to direct lending are earmarked to increase the Federal Pell Grant,” Olsen said in an e-mail to the Tribune. “Anything that can be done to reduce the financial need of this group of students is appreciated.”

The Federal Pell Grant Program provides need-based grants to low-income students. Pell Grants can be used at approximately 5,400 post-secondary institutions, according to the U.S. Department of Education Web site.

Mike Herbst, a sophomore in the College of Communication, said he takes out $2,000 to $4,000 in loans each semester. Herbst said he thinks it will be easier working with the government than with private banks.

“I haven’t had problems with my government loans, only with my private loans,” he said. “Plus, even if it is a hassle working with the government, the lower interest rates make up for it.”