New Law on Student Loans

Today President Obama signed into law an overhaul of the student loan program.  Since two-thirds of college students graduate with some debt, this new law will likely directly affect how you pay for your child’s education.  Notably, the new bill:

• Eliminates the subsidies paid to bank to create the loans.  This will save taxpayers an estimated $68 billion over the next eleven years.  The government has always backed the loans, so the banks have never assumed any risk.

• New loans will be issued directly by the government.  Banks will continue to service the loans, collecting payments when due.

• Loan repayment will be capped at 10% of a new graduate’s discretionary income.  I’ll be interested to see how they define “discretionary income.”  The conventional definition:  “income minus taxes and normal expenses, including rent, transportation, medical expenses…” will leave about $1.95 for most recent grads.

• After twenty years of conscientious repaying (ten years for public service workers), any balance on the loans will be forgiven — erased forever.  This will enable grads to work in relatively low-paying community service jobs, like teaching or public health, if they choose, without worrying about making enough to pay off their student loans.

• The act also directs $2 billion over four years to improve the nation’s community colleges.  The bill notes the important role that community colleges play in retraining displaced workers, helping them re-enter the workforce.  This seems like a great time to help the unemployed get the training they need.

Ending a wasteful subsidy and investing the proceeds in education — now that’s a program where everyone wins.

Well, almost everyone.  Not surprisingly, Sallie Mae lobbied for keeping the loan process in the private sector.  Sallie Mae started out as the Student Loan Marketing Association, a government-sponsored enterprise in 1972.  It became completely private in 2004.  It now operates as the SLM Corporation (SLM) with a market capitalization of over $6 billion.  SLM also owns Upromise, marketing 529 Qualified Tuition Programs in twelve states.

Image credit: Chris Radcliff at Flickr

Full disclosure: No positions in any company mentioned.

Carnival: This post was featured in this week’s Carnival of Personal Finance, hosted at The Wisdom Journal.

Tags: Health Care and Education Reconciliation Act, new student loan law, President Obama, Sallie Mae, SLM, SLM Corporation