Episode 41: A New Option for Student Loans?

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I read this story in the NY Times this morning and it piqued my interest. Could this be the student loan solution we have been waiting for?

I have been lucky to study at two #1 ranked universities in my field of study. The drawback to receiving great education is incurring a massive college debt that is near six figures. Under the current system, college students can borrow a certain amount of federal loans – I believe up to $9,800 per semester (this number is higher for law and med students), and the rest of the loans come from private lenders. Government loans are much better for students because half of the loan is subsidized by the government, meaning we don’t have to pay interest on that portion of the loan. Also the interest rate is fixed, meaning what you see is what you get. To figure how much your loan will cost over its life, one simply needs to pull out a calculator.

Private loans are a bit trickier. Different banks compete for better interest rates, but often these rates are variable, and often higher than Federal Stafford Loans. The big problem is moving your money around; if one wanted to consolidate their loans, especially useful if the student has attended more than one school, coordinating that effort with the banks is a less than pleasant experience, at least for me. Another problem with private loans, is if the bank and the school are using a different system to disburse the loan, messy paperwork can lead to delay in getting the money – a problem I had all 4 times I had to apply for private loans in graduate school (and you’d think the kinks would be worked out after the third mishap!).

From what I gather in this article, what would happen is private lenders would dump their loans onto the government, which would free up money for lending in other areas. However, if the government is going to be handling the disbursement of college loans, then the private student loan industry would effectively become nullified. Of course, I imagine one could still take out a private loan in the future, should these plans proceed, but without the federal guarantee.

This is bad news for the banking industry, but excellent news for students I think. Government bureaucracy gets a bad rap, but in the case of student loans, it is a perfect system. As far as I know, all college with financial aid departments work from the same system, so as long as the student files their FAFSA on time and stays within the school deadlines for filling out loan information, the money is always ready by the first day of school. Private loans can be a nightmare to receive, but it is also a nightmare to pay back. The rules vary from bank to bank, but government loans have more options to help students repay loans in financially tough times. Also, half of the loans are subsided, so there is less interest to pay. Lastly, from a psychological standpoint, owing the government back for a student loan doesn’t feel as bad as owing money to a bank; I feel my private loans are like a massive credit card bill. Government loans have much more leeway for late payments, as they don’t immediately affect one’s credit score until after six months of nonpayment.

I know people will argue that “socializing” education is un-American, but if college students can’t afford to go to school, then we are going to continue to fall behind other countries in innovation – where the U.S. currently ranks as the 6th most innovative country according to some reports. It is not really socialism, one can still pay-as-you-go, borrow from private lenders, and such. It is a better option for most students however, as college tuition costs continue to rise.