Student Loan Reform ApprovedBy Rishi Shrivastava
President Bill Clinton succeeded in keeping his campaign promise to America's youth when Congress approved the Student Loan Reform Act in early August. This policy changes the procedures under which college students obtain and repay educational loans.
Under the new plan, universities are given the option to lend money directly to their students. This saves students money because they avoid private lenders, who currently charge exorbitant interest rates and often accrue unreasonable profits at the expense of their borrowers, according to government press releases.
MIT will not participate in direct lending next year, but will instead monitor the program's progress, according to Stanley G. Hudson, director of student financial aid.
The Student Loan Reform Act's impact on MIT students could be significant. Hudson estimated that as many as 45 percent of MIT undergraduates receive Stafford loans affected by the law. Across the country, Stafford loans will be replaced by direct loans.
"Theoretically, it is very promising," Hudson said.
This system of direct lending is not mandatory for all colleges. As Madeleine Kunin, U.S. deputy secretary of education, said in a May press release, "Schools that ... do not wish to originate loans may use the services of alternative loan originators ... at no cost to the institution."
Schools that do create loans will be financially compensated by the government, she said.
The Department of Education will also help these schools find private lenders, who will compete for customers in an environment of free market competition. This differs remarkably from the status quo, under which lenders often require students to pay a flat rate that is "3.1 percentage points above the Treasury bill rate," Kunin said.
The new system corrects the inefficiencies of the old by eliminating the involvement of the middleman. This helps students because they receive, "a portion of the general cost savings ... in the form of a reduction in the interest rates on their loans," according to the Department of Education.
Taxpayers benefit as well. "The direct lending program will save taxpayers $4.3 billion through fiscal year 1998, and $2 billion per year, thereafter," Kunin said.
The program will be implemented gradually across the country. Hudson said that direct lending will constitute 5 percent of loan volume across the country in the first year of the program, 40 percent in the second, 50 percent in the third, and 60 percent by the 1997-1998 school year.
Because direct lending is being phased in gradually, the Clinton administration should have ample time to correct any problems that may arise, Kunin said.
Plan offers new repayment option
The plan also opens a new loan repayment option for graduates in debt, by allowing them to pay back loans through Excel accounts. These accounts allow graduates to repay loans at a rate proportional to their incomes. Lenders will no longer charge a flat rate.
Secretary of Education Richard W. Riley said that this encourages students "to pursue careers in critically needed ... service jobs without fear of being overburdened with debt."
Although skeptics argue that direct lending limits available funds, the Department of Education refutes this claim, saying that "direct loan capital will not be limited by congressional appropriations."
Furthermore, the DOE adds that direct lending is an entitlement program that is remarkably similar to "the guaranteed student loan program," which follows a need-based policy. Many colleges are already involved in a form of direct lending called the Perkins Loan Program.