October 13th, 2009 
Elisheva Wiriaatmadja
The Student Aid and Fiscal Responsibility Act, promising to reform student loans, is making its way through Congress. SAFRA would then eliminate Family Federal Education Program loans. If the bill passes, bank middlemen will lose their business because the federal government would lend money directly to students. This will save an estimated $87 billion in over 10 years on processing fees by the middlemen.
Unfortunately…
…the bill doesn’t touch private student loans or other alternative loans. These loans are given to students and their families and are outside the federal loan programs. The players include Sallie Mae, Wells Fargo, Chase and Citibank. The problem with these private loans is that they have no consumer protections. Consequently young people are now facing a future with huge debts on their backs. Here are the reason of these problems:
- Private loans have no limit on interest. Most of them have interest rates as high as 18%.
- Private loans have no limit on fees which ranges from 3-4.5% of the loan.
- Private loans have no way out as lenders will never cancel or mitigate a student loan even if the borrower dies or becomes disabled. If a borrower finds out that their school turns out to be a complete fraud that never provided any education, students have no mercy and still have to repay.
- Student loans are almost impossible to amortize. The interest start accruing while the borrower is still in college and by the time they graduate, their $30k loan may turn into $45k.
- If the borrower can not find a job or loses one, the lender may give them “forbearance” which allows them to delay repaying up to one year but the interest will keep accruing so the borrower winds up paying interest on interest.
- Private loans by banks do not have various repayment plans so that they are a reasonable percentage of income.
While the new student loan reform may help students with federal loans, those who have taken out private loans for education will not benefit from the sweeping reforms in the student loan industry.
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Who knows when they will do something to it. My wife has had a student loan for years. I think we are going to be paying even when our kids are going to school. The cost of education is astounding these days. You figure the government would want to get more students in school rather than make it harder with rising costs.
The Student Aid and Fiscal Responsibility Act terminates the Federal Family Education Loan program, which provides subsidies and guarantees to private lenders that make student loans.
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