My Loans Consolidated

The reason why Obama wants to cut out what he calls the “middlemen” is because the federal government is wasting all a lot of money by paying banks who offer student loans to students. The money saved from cutting the middlemen is to expand other financial aid programs for students such as the Pell Grant.

At a New Hampshire event last Tuesday, Obama said, “It turns out that right now a lot of the student loan programs are still run through financial institutions and banks. So you got this middleman, and they get billions of dollars per year managing loans that are guaranteed by the federal government.” Obama explained that the middlemen that he wish to cut off are taking no risks but are still getting huge profits from this.

But the question is, would cutting these middlemen really save taxpayers billions as Obama mentioned that day?

According to Obama’s plan, the government will then be able to provide student loans cheaper by lending directly to students and by eliminating the loan subsidies. Currently, private loans are subsidized known as the Federal Family Education Loan program which is also known as the “guaranteed” student loan. According to the administration’s 2011 budget, by directly lending loans to students from the Department of Education, it save taxpayers money about $43 billion over the next 10 years.

Currently what happens is that the government is paying the difference between the interest that the banks pay on capital and the rates the students pay the banks. The difference is capped at 6.8%.

By ending this subsidy program for private loans, the Obama administration would save money and then propose to use the money to lend directly to students, offer some relief from loan payments for graduates, expand Pell Grants and improve community colleges.

It does look like the proposal is going to give a positive impact in the student loan industry. However,…

Despite the restrain to other domestic spending in the 2011 budget, Obama is trying to expand Pell Grants which would raise the top grant to $5,710 in 2011 and also make the program available to additional one million students. Nevertheless, there are many researchers who believe that the expansion of the grants and other federal aid has a counterproductive effect — that colleges and universities simply soak up the gains by increasing their tuition and other costs.

The debate whether the student loan taken over by the Federal government will actually give a positive or negative effect on the nations’ future and the rising college cost is published in the New York Times’ blog Room for Debate. To read the whole debate click here.

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