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A war is raging in the student loan industry, and private lenders may be losing a crucial battle. Recently, I came across a bill that the House Committee on Education and Labor began working on, introduced by Rep. George Miller (D-CA) in July. The bill calls for all government-subsidized loans to be disbursed by the Department of Education. Private lenders would no longer be able to offer these types of loans.
Of course, private lenders couldn’t go without the “free markets breeds competition” argument, fearful that they will be cut out of the student loan industry altogether. “We offer the ability to maintain the diversity needed to keep competition up and pressure on other lenders,” Christopher Chapman, CEO of Access Group, a private nonprofit student lender, told Kiplinger’s Personal Finance magazine last month.
While private lenders may lose a portion of funds from the federally backed loans in the form of subsidies, it’s absurd to say they’ll be completely knocked out of the industry.
The reality is government loans only cover a portion of overall tuition for students in need. Students will continue to rely on private lenders to cover remaining tuition and living expenses.
As loan markets tighten, tuition rates continue to spiral. Between 1997—98 and 2007—08, prices for undergraduate tuition, and room and board at public institutions rose by 30%, and prices at private institutions rose by 23%, after adjustment for inflation, according to the National Center for Education Statistics (NCES).
Of the students who graduated in the 2007-2008 academic year, nearly 30% of bachelor’s degree recipients had a total loan debt exceeding $20,000, according to College Board. These numbers don’t even include debt incurred by students who attend graduate school.
Students are also using credit cards at record rates, oftentimes to fill in the gap where parents, scholarships, grants, and loans fall short. The average credit card balance grew to $3,173, according to Sallie Mae’s 2009 study, How Undergraduate Students Use Credit Cards. This is the highest balance since the study’s inception in 1998.Â Meanwhile, according to the same report, 21% of undergraduates had balances of between $3,000 and $7,000, also up from the last study in 2004.
Certainly, if the legislation is passed, the business may not be as lucrative, but it will still be lucrative nonetheless. And since when should free market theories come at the expense of college education? America has been at the economic forefront because of our highly educated society. Making access to tertiary education difficult for Americans will in the future do a greater disservice to the U.S. economy than any bubble burst.
Other components of the legislation will:
–Increase the Pell Grant annually, starting with $5,550 in 2010 and maxing out at $6,900 in 2019
–Keep subsidized loan rates, which will drop to 3.4% in 2011, from rising back to 6.8%
–Increase access to the Perkins Loan program
–Invest $1.2 billion in funding for Historically Black Colleges and Universities and Hispanic Serving Institutions
–Expanding access to kindergarten and early education programs
Students and parents chime in. If passed, will the legislation ease your student loan burden? What do you think is the biggest challenge when it comes to paying for college?
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Renita Burns is the editorial assistant at BlackEnterprise.com.