Proposed HR 5 Bill Hits College Students Right In Their pocket
The Government Occassionally Comes Up With Some Great Ideas…
This is NOT one of them
“Hi, I’m from the government and I’m here to help.”
If you believe that’s true, then you’re going to love what the government is trying to do to your student loans.
Congress has introduced a new bill called the College Student Relief Act of 2007 or “HR 5.’ You can’t judge a book by its cover and the same thing is true with titles attached to proposed legislation. The stated goal of HR 5 is :
“To amend the Higher Education Act of 1965 to reduce interest rates for student borrowers.”
And that’s a noble cause, to be sure, but student loan professionals fear that exactly the opposite is going to occur. Here’s why…
A United States Department of Education program called the Federal Family Education Loan Program (FFELP) is a streamlined process that allows private organizations to market, originate, and service federally guaranteed loans, such as Stafford and PLUS loans, to students and their parents. FFELP is the private industry side of the Government-operated Federal Direct Student Loan Program or ”Direct Loans”.
HR 5 proposes to eliminate FFELP and make the Department of Education the sole provider of student loans. The bill claims that this will reduce costs to students but does it really?
The Department of Education (D.O.E.) offers the same exact loans as private lenders do. Although the interest rates start out exactly the same, private lenders offer incentives that end up lowering the student loan interest rate. The D.O.E. does not.
How much are those incentives worth?
Take a typical student loan with a balance somewhere around $30,000 - $35,000 and an interest rate of 7.14%. Under the government’s direct loan program the student pays the 7.14% interest rate for the life of the loan. With a FFELP provider, however, the student has the opportunity to lower that rate to just 5.375%. Let’s take a look at how that can happen:
| Current Loan Rate |
7.14% |
| .6% rate reduction earned for grace period rate application | -.60% |
| New rate for qualified grace period loans | 6.54% |
| Rate rounded up to nearest 1/8 percent weighted average | 6.625% |
| .25% rate reduction for direct debit payments | -.25% |
| 1.00% rate reduction earned after 36 on-time payments | -1.00% |
| Net new interest rate after all available discounts | 5.375% |
These available interest rate deductions result in a $7,622.56 savings over the life of the loan. Since the government’s Direct Loan program doesn’t offer incentives, the so-called College Student Relief Act of 2007 ends up costing more. But you’d never know that by reading the Congressional propaganda.
Increased costs aren’t the only bad news that comes with this proposed legislation. It gets worse. I’ll tell you more tomorrow.
Refer this post to others
I’m From The Government And I’m Here To Help (Part 2)
The interest rate reductions that I wrote about in my previous post are called Borrower Incentive Programs (BIPs) by the FFELP private student loan industry. The keyword here is INCENTIVE. That’s an important word because the entire concept of student loan incentives didn’t even exist before private lenders got into the student loan business. And why should they have existed? When you’re the government and you have no competitors you have no need to incent customers to do business with you, right?
Venezuela’s President Hugo Chavez certainly understands the economic value of not having to worry about dealing with competitors. That’s why he recently ordered by decree the takeover of oil projects run by foreign oil companies in Venezuela’s Orinoco River region.
According to Chavez, “The privatization of oil in Venezuela has come to an end. This marks the true nationalization of oil in Venezuela.”
So what’s going to happen when the “true nationalization” of student loans comes to America? Well, in addition to the probable loss of financial incentives which some say will amount to a “Student Loan Tax”, we can expect to experience more examples of the government’s innovative customer service solutions like this one:
In response to postal customer complaints about excessive time spent in Post Office lines, the U.S. Postal Service responded by removing the clocks in the lobbies of over 37,000 Post Offices with the longest waiting times. You can’t make this kind of stuff up folks: Postal Service fixes long waits by removing clocks
But it’s not just government agencies that come up with innovative problem-solving solutions. When “Big Labor” began pressuring Congress to “break the labor unions”, Rep. George Miller, (D-CA) who is also the sponsor of the HR 5 bill, voted to strip workers of their right to secret ballot elections in union affairs. Problem solved.
Interestingly, however, he also went on record as supporting secret ballots for workers in
Some of you are probably thinking that missing clocks and Senators who bury their conscience in the sand are one thing, but what does all that have to do with your student loans?” Well, the U.S. Department of Education has a long history of sticking its own head in the sand when times get tough.
Take a trip in the way-back machine to this September 9, 1997 Washingtom Post article where we see that the U.S. Department of Education abruptly stopped accepting applications from recent college graduates trying to consolidate or refinance their tuition loans because the agency couldn’t handle the “enormous backlog of those requests.”
In a typically bureaucratic response, the government addressed the problem by avoiding it. Trust me when I tell you that in the private sector the response would have been to staff up to handle the increased demand for new business. But the government doesn’t operate like a business that exists to serve its customers. It acts like, well, the government.
So what’s going to happen if HR 5 passes and the Department of Education once again is faced with an enormous backlog of those requests? We’ll probably start reading more quotes like this one:
“From the very start of the program, I doubted the department’s ability to become one of the largest banks in this country,” Rep. William F. Goodling, R-Pa., chairman of the House Committee on Education and the Workforce, said last week. He called the department’s inability to consolidate student loans quickly and efficiently “irresponsible.”
The saga continues. More tomorrow.
Refer this post to others
HR 5 – The Big Lie
You’re going to be hearing a lot of political spin being put on the College Student Relief Act of 2007, or “HR 5, as the politicians behind it attempt to sell
But there’s something about spin that doesn’t hold up under the light of truth so let’s shine a little bit of light on HR 5 and see what’s really going on.
We begin with a quote from House Speaker Nancy Pelosi:
“Greater college affordability is a top priority for our New Direction for
America, and we intend to achieve it. Democrats have a plan for college affordability: our New Direction will begin by cutting student loan interest rates in half.”
The there’s this quote from the full New Direction for America proposal by House Democrats in the 109th Congress:
“Our New Direction plan will slash interest rates on college loans in half to 3.4% for students and to 4.25% for parents.”
Can you pick out the spin? It’s the part that says “cutting student loan interest rates in half,” and the other one that says “slash interest rates on college loans in half to 3.4% for students and to 4.25% for parents.”
Hang on a second while I turn on my truth light so we can look at that 50% interest rate cut a bit more closely…
Ah, here’s the truth…
The House is proposing the Great American Student Sellout and here’s why:
Instead of actually cutting student loan interest rates by 50%, like they say in their spin documents, the proposed bill only phases down the fixed rate over a FIVE year period and that phase-down is ONLY for subsidized loans taken out by undergraduate students.
The real truth is:
The 3.4 % interest rate stays in effect ONLY from July 1, 2011, through January 1, 2012. On January 2, 2012, the interest rate returns back to 6.8 percent!
Yikes! That’s a lot different than their pledge to “slash interest rates on college loans in half to 3.4% for students and to 4.25% for parents.” Where’s the savings?
It gets worse…
Even though the proposed bill is called the “College Student Relief Act”, it doesn’t actually provide even $1 of relief to college students. Here’s why:
Because the bill focuses on reducing interest rates for subsidized college loans, only those people who are out of school and actively repaying those loans will see any of those savings.
And here’s some more truth:
The meager savings offered by HR 5 only barely benefit college graduates. Actively enrolled college students receive no benefits at all. So much for the claim that “Greater college affordability is a top priority for our New Direction for
Just when you’re probably thinking that all of the truths behind HR 5 have been vetted, you realize that all of these “cost savings” have to come at a price. Tomorrow we’ll look at that price.
Refer this post to others
False Promises + False Savings = Higher Student Loan Costs
The government claims that HR 5 will save taxpayers money. The problem is, the government has a pretty poor track record on saving money and there is no reason to expect that things are going to change now.
Before we take a look at the hidden costs of supplying student loan money through the government, let’s take a look at what the U.S. Department of Education (DOE) actually has to say about the Federal Family Education Loan (FFEL) program that Congress is trying to abolish.
“The Department of Education operates two major student loan programs: the Federal Family Education Loan (FFEL) program and the William D. Ford Federal Direct Loan (Direct Loan) program. These two programs meet an important Department goal by helping ensure student access to and completion of high-quality postsecondary education. Competition between the two programs and among FFEL lenders has led to a greater emphasis on borrower satisfaction and resulted in better customer service to students and institutions.”
The DOE goes on to sing the praises of FFEL by saying this:
“The FFEL program makes loan capital available to students and their families through some 3,500 private lenders. There are 35 active State and private nonprofit guaranty agencies which administer the Federal guarantee protecting FFEL lenders against losses related to borrower default. These agencies also collect on defaulted loans and provide other services to lenders. The FFEL program accounts for about 75 percent of new student loan volume.”
So here we have a case where Congress is attempting to outguess the Department of Education and legislate what’s “best for us” despite the fact that neither the borrower nor the DOE itself wants anything to change.
Now here’s where we start getting into the hidden costs that Congress doesn’t want you to know about. Let’s take a look at one more DOE quote first:
“Under the Direct Loan program, the Federal government uses Treasury funds to provide loan capital directly to schools, which then disburse loan funds to students. The Direct Loan program began operation in academic year 1994-95 and now accounts for about 25 percent of new student loan volume.”
Let’s follow the money trail…
The Federal government uses Treasury funds to provide loan capital directly to schools.Treasury funds is a kinder and gentler way of saying that it uses the income tax money that we all pay to fund the student loans. Since they are loaning your money to you, isn’t it a bit unfair that they would charge you interest? But that’s not the issue; this is:
The FFEL program accounts for about 75 percent of new student loan volume and the Government’s own Direct Loan program accounts for just 25% of student loan volume. Why is this issue?The Direct Lending Program ADDS to the National Debt! In its typical “pay more than you need to” spending policy. The Department of Education has borrowed an astounding $105 billion to operate the Direct Loan Program yet it only has $89 billion available to repay that loan. This means that is costs U.S. Taxpayers 16 BILLION DOLLARS to LOAN THEMSELVES their own money so they can go to college! Where’s the savings in that?
Not only is the government spending more than it is earning on the Direct Student Loan program, but it’s not exercising even a moderate degree of management over this money as demonstrated in the following excerpt for a report on the Top 10 Examples of Government Waste:
“In 2002, the Department of Education received an application to certify the student loan participation of the Y’Hica Institute in London,
“The Education Department administrators overlooked one problem: Neither the Y’Hica Institute nor the three students who received the $55,000 existed. The fictitious college and students were created (on paper) by congressional investigators to test the Department of Education’s verification procedures.
“All of the documents were faked, right down to naming one of the fictional loan student applicants “Susan M. Collins,” after the Senator requesting the investigation.
“Such carelessness helps to explain why federal student loan programs routinely receive poor management reviews from government auditors. At last count, $21.8 billion worth of student loans are in default, and too many cases of fraud are left undetected.
“Tracking students across federal programs, verifying loan application data with IRS income data, and implementing controls to prevent the disbursement of loans to fraudulent applicants could save taxpayers billions of dollars.”
Yes, Congress wants to turn the Department of Education into the single largest bank in America. Then, in one fell swoop, they’ll eliminate all options for 75% of student loan borrowers who have turned to the FFELP lenders for student loans because FFELP lenders not only promise to lower loan repayment costs – they deliver those savings.
Don’t be taken in by bureaucratic double-speak. Contact your member of Congress NOW and urge him or her to vote “No” on HR 5. It’s your money; keep more of it in your pocket where it belongs.
Refer this post to others
NY SUN Columnist Herbert London “Gets It”
Another sane voice has been heard from on the HR 5 issue and this time it’s the voice of noted NY Sun columnist Herbert London.
More than just a columnist, Mr. London is the former John M. Olin Professor of Humanities at New York University and is currently the President of Hudson Institute. It is precisely because of his extensive educational background that his column in today’s New York Sun is so telling.
Mr. London starts out by saying that on the surface the provisions of HR 5 “seems quite desirable.” And, to untrained eyes, HR 5 does look good. But when trained eyes, such as those located on either side of Herbert London’s nose, take a deeper look – everything starts to fall apart.
Writing about the Department of Education’s “Direct Loan” program, London says:
“In fact, the program has not provided savings and is paying out more in interest payments — calculated at about $16.5 billion — than it has received from borrowers since its inception.”
That’s what I’ve been saying all along and now it’s been independently verified by someone with close ties to the educational community.
When a prominent educator and college president thinks that HR 5 is a bad idea, Congress needs to slow down and take a second look.
Don’t be taken in by bureaucratic double-speak. Contact your member of Congress NOW and urge him or her to vote “No” on HR 5. It’s your money; keep more of it in your pocket where it belongs.
Refer this post to others
Could Government Profits Be The Motivator Behind HR 5?
The government claims that HR 5 is all about making the student loan experience less expensive for the borrower. We’ve already seen how that goal isn’t reached by the proposed HR 5 bill. Could there be a more insidious reason behind this proposed legislation?
As all good journalists know, when you want to discover the truth, follow the money. Read this quote from a recent briefing given by the Department of Education as reported in the National Council of Higher Education Loan Programs, Inc. (NCHELP) newsletter dated March 19, 2007.
“According to the Department of Education, FFELP (private) consolidation loan volume this year comes close to matching last year’s pace even though the interest rate environment has changed dramatically. For FY 2007 through January, new FFELP consolidation loan activity totaled $17.1 billion. For the same period last year, the total was $19.4 billion. Comparable Direct Loan (government) numbers for FY 2007 and FY 2006 are $1.2 billion and $4.3 billion, respectively. Thus, while FFELP consolidation activity is close to that of last year, DL consolidations (government loans) are down considerably.”
Do you smell the money yet? The smoking gun appears in this paragraph:
“For the month of January 2007, FFELP (private industry) consolidations totaled $3.86 billion while DL (government) consolidations totaled only $210 million. DL’s market share of consolidation volume in January thus stood at slightly more than 5%, and is not much higher for the first four months of the fiscal year. Last year, DL’s market share stood at 18.1%.”
For an industry that the government claims is not meeting student needs, an awful lot of student loan borrowers have turned to the private FFELP market to consolidate their student loans. Is it possible that the government is upset because it’s not getting its unfair share?
A lot of people think that HR 5 is all about greed and diverting more money from the pockets of hard-working college graduates into the public coffers. Facts and figures don’t lie.
Don’t be taken in by bureaucratic double-speak. Contact your member of Congress NOW and urge him or her to vote “No” on HR 5. It’s your money; keep more of it in your pocket where it belongs.
Refer this post to others