Direct-Lending Program for Student Loans Proposed; Sallie Mae Shares Drop

Wall Street Journal ^ | 2/26/09 | WSJ

[cowtowney]

Renewing a battle waged during the Clinton administration, President Barack Obama proposed to eliminate private lenders from the student-loan market and have the federal government make all such loans directly.

In his spending blueprint for fiscal 2010, Mr. Obama said the shift to the Department of Education's so-called direct-lending program would save more than $4 billion a year in subsidies paid to private lenders and eliminate uncertainty for students "because of turmoil in the financial markets."

Direct loans only accounted for about 20% of the $68.2 billion in new federal loans during for the 2007-2008 school year, but interest in them has surged recently as many private lenders have stopped making federally guaranteed loans amid the credit crunch.

Student loans themselves don't generate significant earnings for banks because of the high level of defaults, so the fees paid by the government are the main incentive for lenders to take part in the program.

One of the largest players in the student-loan market, SLM Corp., saw its shares fall 26% as word of the proposed change filtered out Thursday morning. SLM was down $2.17 to $6.22 a share in early trading on the New York Stock Exchange.

[markman46]

wrong.. student loans go on the credit report, and if you don’t pay it shows up, I know I have a consolidated sudient loan and all the old loans are still on my credit report back to 1985..

[GOPJ]

Too many of the private lenders are crooks. If this is done right - it would be a good thing. My concern? What are the odds dems will do it right? ( Hint: wrong is giving the crooks in higher education a carte blache... )

[dr_who]

Not a bad idea. When the program collapses, the government gets the blame instead of the private banks if there are any private banks left by that time.

[jokyfo]

For later

[WhyisaTexasgirlinPA]

I thought student loans were never discharged? Even bankruptcy doesn’t discharge student loans - so how do they “go away”?

[WhyisaTexasgirlinPA]

Why do you say private lenders are crooks? My sister works in the student loan dept of a bank and said the dems voted to change the rate structure of loans two years ago and that is why so many private lenders have dumped their student loan departments - Congress is the problem - they got their filthy hands in there and screwed it up for everyone. There is no way student loans will be any cheaper or easier to get throught the government -

[SunkenCiv]

H.R.1106-Prevent Mortgage Foreclosures ....
Act. Vote Next Week, Only 1 hour of Debate
http://thomas.loc.gov/ | February 26, 2009
Posted on 02/26/2009 11:30:17 AM PST by cc2k
http://www.freerepublic.com/focus/f-news/2194752/posts

Chamber of Commerce Lambasts Obama’s “Robbing Peter to pay Paul”,
“Command-and-control” Approach
US Chamber of Commerce
Posted on 02/26/2009 11:54:48 AM PST by quesney
http://www.freerepublic.com/focus/f-news/2194774/posts

[SunkenCiv]

Renewing a battle waged during the Clinton administration, President Barack Obama proposed to eliminate private lenders from the student-loan market and have the federal government make all such loans directly.

The Grace Commission recommended (among many other things) to move the gov't from making direct student loans to guaranteed student loans. Direct loans were a bloated disaster, and going back to those is just stone cold stupid.

[Hawk720]

Just so you know, this isn’t a NEW program they are proposing. It’s an existing program, and has been around since the early 1990s. It was started in 1992 or 1993, and was supposed to be phased in to take over all student lending. When the GOP took over Congress in 1994, it was slowed down.

Currently each school chooses whether they want to participate in the Direct Loan program, or the Federal Family Educational Loan Program (commonly known as Stafford). The two loans are essentially the same - same loan limits, same requirements and terms. The only difference is the origin of the funds - either from a bank or from the feds.

Currently I believe about 35% of schools are in the Direct Loan Program, with the rest in FFELP. Those numbers may be a bit off, as there were a lot of schools that made a quick switch to Direct Loans when the credit market started to freeze up last summer.

My point: this isn’t a NEW program. It’s an existing one that’s been tested and works for more than 15 years. Whether or not it could handle the full weight of loans for all schools is debatable, and I don’t see the lending industry allowing it to happen. Though literally hundreds of banks have gotten out of student lending in the past year, anyway, so maybe Sallie Mae (which is just an evil company) will be the only ones who care.

(Disclaimer: I am a financial aid professional at a graduate school.)

[Richard Kimball]

I wasn't clear in my first post. What I meant to say was that I suspected this is where they're looking at taking the student loan program, not where it is now. Currently, student loans aren't discharged until payed and can't be cleared by bankruptcy, IIRC.

I suspect that the current administration will move away from that.

[WhyisaTexasgirlinPA]

Ok thanks

[WheresMyBailout]

This is incorrect. A student loan in default is the worst thing you can do as it is not dischargable and will disqualify you from many jobs.

[Richard Kimball]

I’ve already posted once, but in my original post I was speculating on where Obama wants to take it, not where it stands now.

[WheresMyBailout]

OK, thanks for the clarification.

[April Lexington]

OK... so this means, the GOVERNMENT will own your degree until the loan is paid off! Just like the banks. You take the money you take the strings. So, enjoy your PEACE CORPS stint after college, the Habitat for Humanity stint and a 25% discount on social security payments because you have a college degree...