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While most changes to the nation's health insurance system won't take effect for several years, students and parents borrowing to pay for college in Alaska and across the country will see their options - and interest rates - change starting in the fall semester.
Passed as a part of the reconciliation fix companion to the original health reform legislation and effective July 1, the U.S. government through the Department of Education becomes the exclusive provider for student loans. The move eliminates a federal loan guarantee program created in 1965 that backed banks and not-for-profit lenders to ensure accessibility to loans at affordable interest rates.
The Federal Family Education Loan Program, which accounted for roughly 75 percent of the total student loan volume annually, is no more. In its place is the expanded Direct Loan Program, with loans made to students from the U.S. Treasury.
Students will still fill out the Free Application for Federal Student Aid, but rather than sign with a choice of lenders, they will sign a promissory note with the U.S. government to receive a loan.
The FFELP insured private lenders against default and guaranteed a certain rate of return between the cost of capital to the lender and interest income from the borrower through special allowance payments, or SAP.
Eliminating the allowance payment subsidies to private lenders was touted during the health reform debate as a savings to the federal government of $61 billion over 10 years.
About $40 billion of the projected savings will be put toward increasing Pell Grants from $5,550 in the 2010-11 school year to $5,975 by 2017.
The bill also provides for loan forgiveness after 10 consecutive years in government or nonprofit work, or after 20 years of payments, compared to 25 years under previous law. It also reduces the amount of payments from 15 percent of income to 10 percent.
A second scoring of the student loan changes by the Congressional Budget Office using fair value accounting methods rather than the Federal Credit Reform Act Standards muddies the math, however.
Since 1990, the FCRA specifies how credit programs must be treated for federal budget purposes and excludes administrative costs and associated future market risks of lending.
Prepared at the request of Senate Budget Committee ranking member Judd Gregg, R-N.H., the CBO calculated the student loan changes measured under fair value standards will actually increase the deficit by $52 billion over 10 years.
The disparity is tied to two main factors: the possibility of increased default rates - student loan defaults have increased from 4.6 percent in 2005 to 6.7 percent in 2007 - and an inevitable rise in interest rates.
CBO scoring under FCRA is using current, historic lows in borrowing costs by the Treasury. Fair value accounting takes into account lending costs to the government once rates go up.
Education officials in Alaska strongly opposed the student loan changes, arguing costs for students in the state will increase as a result. It was ultimately a losing battle.
"That's the realities of life," said Ted Malone, director of financial assistance for University of Alaska Anchorage. "Alaskans saying, 'No, we hate that,' isn't a national event."
Benefits go bye-bye
Through the income generated from its $724 million student loan portfolio, the Alaska Commission on Postsecondary Education was able to provide around $4 million in benefits to borrowers in 2009 through waived origination fees and reductions in interest rates and principal.
Because of volatile market conditions brought on by the sub-prime housing crash and the College Cost Reduction Act passed in September 2007, the profitability of issuing student loans has already been nearly a net zero or even negative since then.
Without new volume, ACPE Executive Director Diane Barrans said the organization will not be able to offer borrower benefits for 2010-11 on any of its loan products.
Borrowers with current ACPE loans will not be able to consolidate their loans into the federal direct loan program without losing their current repayment benefits.
The ACPE will still offer Alaska Supplemental Education Loans, essentially a state-backed version of the federal guarantee program. Because the ACPE funds its loans through the private capital markets, it has been forced to tighten credit standards and its loan volume for the alternative loans has since dropped by 60 percent.
Malone said the University of Alaska Anchorage saw an $8 million decline in alternative loan volume just last year.
While needs-based benefits through the U.S. government will still exist for college borrowing, Alaska students and parents who don't qualify for federal subsidies will pay higher interest rates starting in the fall semester.
The ACPE offered a variety of interest rate reductions for unsubsidized borrowers, including a 1.2 percent reduction for attending an Alaska school or living in Alaska during repayment, a 0.25 percent reduction for setting up a direct payment plan through a bank account and a 2 percent reduction after 48 months of on-time payments.
A borrower with an unsubsidized Stafford loan through ACPE who took advantage of all benefits previously offered could reduce his or her rate from 6.8 percent to 3.35 percent, a savings of thousands of dollars over the life of a loan.
Barrans said the FFEL as constructed was "ideal" for Alaska from a public policy standpoint.
"We were taking income off the loans themselves and it seemed appropriate that we tried to reduce the cost of borrowing across the board," Barrans said. "Looking at the projections for the next year or two, we will not be able to offer any borrower benefits."
The federal direct loan program won't have any such benefits for unsubsidized loans and will include the 1 percent origination fee most lenders waived based on competitive pressures.
Alaska is not alone, as many rural states with a single large entity providing the bulk of loan originations will see costs increase for their students who don't qualify for needs-based financial aid, such as Pell Grants or subsidized Stafford loans, the latter of which will see rates capped at 3.4 percent by 2011-12 but set to rise back to 6.8 percent in 2012-13 unless Congress acts.
The Wyoming Student Loan Corp., a not-for-profit lender that provided about two-thirds of loans at in-state colleges, returned about $20 million in benefits to borrowers during the last 10 years, according to CEO Phil Van Horn.
The Montana Student Loan Guarantee Program used its income to provide grants totaling about $2 million during the last five years and will not offer any for the upcoming school year after giving $300,000 to about 250 students for 2009-10.
The Bank of North Dakota, which wrote the very first FFEL in 1967, paid $3.3 million in origination fees for students during 2008.
Proponents of the student loan overhaul cite the savings to the government through discontinuation of the special allowance payments to lenders.
Lenders counter that the Department of Education has reaped millions in rebates since late 2007, after President George W. Bush signed the College Cost Reduction Act, or CCRA, which slashed SAP subsidies to lenders.
"There hasn't been a subsidy paid to a lender in two years," said Montana Student Loan Guarantee Program Director Bruce Marks. "(Saying lenders are subsidized) is an interesting statement that gets made that can be very misleading."
In order to guarantee lenders a certain rate of return on student loans to help cover administrative costs, servicing loans and default management programs, SAP subsidies are made based on a formula that includes the prevailing rate for three-month financial commercial paper, or FCP.
Because lenders use the private capital markets to fund their student loans, when the total of the FCP rate and the SAP subsidy rate exceed the 6.8 percent federal cap on student loan rates, the education department pays the difference to the lender. When the total is below 6.8 percent, the lender rebates the education department for the difference.
Since August 2007, the Federal Reserve has cut interest rates from 5.25 percent to between 0 and 0.25 percent trying to stave off the recession. Three-month FCP rates have dropped dramatically in concert and the Alaska Commission on Postsecondary Education rebated $6.9 million to the education department during 2008 and 2009.
Wyoming Student Loan Corp. rebated $2.9 million during 2009 and the Bank of North Dakota rebated $4.4 million during 2008. Alaska's Barrans said the ACPE's loan portfolio hasn't made money for the last 18 months.
"The tanking in the market was what caused that to occur," she said. "Had they not changed the formula in terms of lender yield, we may have broken even. The combination of those two things has led to us being underwater."
Marks said increased Pell Grants would benefit a significant amount of Montana students and low income Alaskans, but also noted the government will make a tidy profit through the Direct Loan Program at current rates from middle class borrowers who don't qualify for discounted aid or grants.
The current cost of the government to borrow on three-month Treasury bonds is 0.2 percent. It will be able to collect 6.8 percent on standard, unsubsidized direct loans and more than 8 percent on consolidated loans.
"Why aren't those savings being passed on to borrowers?" Marks asked.
Van Horn of the Wyoming SLC has a theory about that.
"Those of us, the baby boomers, can tip our hats to the students who are going to subsidize our health care," he said.