The Unkindest Cuts
Anya Kamenetz is a columnist for the Village Voice and author of Generation Debt: Why Now is a Terrible Time to Be Young, about student loan debt, the job market, and other matters of generational politics The book is forthcoming from Riverhead Books in February 2006.
A plurality—32 percent—of the $39.7 billion in cuts in the current budget reconciliation bill come from the student aid programs. The $12.7 billion represents the largest reduction in the history of federal student aid. I bet the nation's population of college students—who are in their 20s, on average, and working about 30 hours a week—didn't realize they were the single most financially healthy sector of society, strong enough to bear the bulk of the sacrifice for everybody.
What's insidious about the current reductions is that the Republicans who negotiated them claim the cuts are coming out of the $17 billion in annual subsidies to banks that lend money through the Federal Family Education Loan Program (FFELP). Rep. John Boehner, the chairman of the House Education and the Workforce Committee, points to changes like the elimination of 9.5 percent bond recycling, a notorious loophole that was costing the government up to $1 billion a year. The House and Senate leadership and the banking lobby alike take advantage of people's confusion about a Byzantine system to obscure the true import of what they're doing.
Yet student advocates like the State PIRGs, relying on government data, show that 70 percent of the savings are really on students' shoulders. They come from raising interest rates on loans, increasing tax payments for parents who borrow and rerouting excessive payments from borrowers to the government instead of to lenders. They're proposing to spike the variable interest rate on student loans, which was 5.3 percent in 2005/2006, to a fixed rate of 6.8 percent.\\ For parents who take out PLUS loans to pay for their children's education, the rate is going up from 6 percent to a fixed 8.5 percent.
If Congress were serious about reducing excess subsidies to lenders, there's a simple remedy at hand: the direct loan program, where the Department of Education borrows money directly from the treasury and lends it to students, with their schools writing the promissory notes. A dozen years of government data show that direct loans cost one-tenth as much in subsidies as FFELP. Among other reasons, the federal government can borrow money more cheaply than anyone else. The STAR act was introduced in both houses of Congress last year; the plan was to encourage colleges to switch to direct lending by rebating the savings directly to the schools, which could then give the extra out as grant aid. If 100 percent of student loans were made by the direct loan program, the authors of the STAR act calculated, the government would save $60 billion over the next 10 years without reducing federal aid one cent. Yet the proposal languished.
Instead, the proportion of annual loan volume in the direct loan program has declined from 33 percent to 23 percent since 1998. Schools have been wooed away by special interest rate and fee discounts from lenders like Sallie Mae. And the current bill takes new swipes at the direct loan program. Currently, students who hold student loans from banks have the right to consolidate their debt by taking out a direct consolidation loan. This allows them to take advantage of income-contingent repayment, a plan offered only under the direct loan program, where you pay a percentage of your income, not a fixed payment, and the debt is canceled after a maximum of 25 years. Needless to say, this provision is a lifesaver for the neediest students, particularly the one-half of all students who begin college and don't finish. The bill now before the House takes away that right, in a move reminiscent of last year's bankruptcy bill for its utter indifference to the plight of those who are forced into unmanageable debt to pay for the necessities of life.
Why on earth would the government, in a time of unprecedented cutbacks in social spending, want to squash the cheaper direct loan program in favor of the more expensive subsidized loan program? Why would students be made to take the brunt of these cutbacks when both ends of the political spectrum agree that a better-educated workforce is essential to America's future competitiveness? Well, you could ask Terri Shaw, the head of the Office of Federal Student Aid in the Department of Education, which administers both programs. She spent most of her 22-year career working for Sallie Mae. Or you could ask Rep. Boehner, who received $136,470 in contributions over the last election cycle from members of the student loan industry, $22,375 from the Sallie Mae PAC alone. Or Rep. Howard ("Buck") McKeon, also of the House Education and the Workforce Committee, who got $77,750 from Sallie Mae. But you probably wouldn't get a straight answer from any of them.
\\ This article has been corrected. Originally, the piece contained the sentence "This increase could cost the average student borrower, who owes $17,600 at graduation, an additional $5,800 in interest payments over the life of the loan." These figures are no longer correct.