Changes in Financial Aid

Financial aid has recently become a hotter topic in the mind of many more Americans, as we survive a recession. However, there is light at the end of the tunnel. We count with enhanced Government support, especially led by President Obama, who strongly advocates towards positive change in the field. Supporting Americans to achieve higher education has been one of the core initiatives and focus points of this administration. True to its values, U.S. leadership has introduced reform that makes the Financial Aid process a promising one towards the future.

Until now, student loans have been mostly handled through private banks and other financial institutions. As part of this process, while the Federal Government sponsors these loans, private banks offering and managing loan programs benefit from earning a percentage. This percentage is one that will soon cease to exist, as a new bill is passed in Government. The plan is for the Fed to bypass banks and private lenders to provide these loans directly to students – no middleman involved.

No doubt, there is a lot of resistance from the private sector, as a cash cow is being sent to the slaughter house. However, keep in mind that the new system, although destroying the private student lending industry, will positively affect the lives of most Americans (even private lending managers). With student loans being directly provided by the government, we are saving 3-4% of loan costs, which translates into government savings of $86.8 billion over the next 10 years, as reported by David Lightman from The Miami Herald. Quoted by Lightman, House Education and Labor Committee Chairman George Miller, D-Calif., explains that the legislation should support students with “no cost to taxpayers.”

Although it might seem so, this is not the first time an initiative like this one has been launched. A few years back, Clinton’s administration also supported a federal student loan program that bypassed banking institutions. However, it is now that this initiative has been fully undertaken, and gaining speed as we speak.

Student loans have become a reason for many to encounter financial distress, to say the least. They represent one of the primary reasons why individuals cannot pay their debts, consumed with interest payments that are unmanageable. However, current instruments do not provide feasible alternatives for individuals in distress. As explained by Dwyer and Associates, when earning $80,000 a year and having $200,000 in student loans debt you would think it should be easy to discharge this debt in bankruptcy. However, “student loans are not an easy type of debt to discharge. Actually, student loan debt is one of the hardest debts to discharge, and for 99% of people, it is impossible to discharge this debt altogether.” For this reason alone, reform is urgently needed, as education becomes every day more inaccessible to most Americans, subsidies are not enough, and more people wise up to this situation. Do we want to encourage a society where education is unaffordable?

How does the new bill directly affect us?

In simple terms, we should see a more controlled loan environment, with lower interest rates that allow for students to pay off their debt without going bankrupt in such large numbers. Savings will positively affect Federal Education budget, allowing for increased expenditures in programs that will directly benefit students, and not banks. It is a challenging undertaking for the government to directly manage all loan process, and this could present a problem.

With the Free Application for Federal Student Aid (FAFSA) process, it has taken many years for the government to provide a more comprehensive tool, one that parents and students can handle easily. Still, it is not 100% straightforward, and many consider it gruesome to handle. With the new loan system, I foresee impact to be felt in navigating the process while the specific loan offices get organized and make the process as user-friendly as possible. There is a learning curve to be overcome, but once it is, we shall encounter clearer skies.

By Claudine Vainrub, MBA and Principal of EduPlan