March 30, 2012
Earlier this week, the Supreme Court heard oral arguments on the challenges to the Patient Protection and Affordable Care Act, which, coincidentally, marked the two year anniversary of its enactment on March 23, 2010.
As many undoubtedly recall, the ACA was amended shortly after it was signed into law by President Obama to reconcile the Senate’s version of the bill with the House’s.
Although the amendment – the Health Care and Education Reconciliation Act – contained many small tweaks to the ACA, it also contained an entire section unrelated to health care.
That section dealt with student loan reform, and it was essentially a slightly modified version of the Student Aid and Fiscal Responsibility Act (SAFRA), which was passed by the House in 2009.
Attached as a rider to the Reconciliation Act, SAFRA was signed into law two years ago today.
One of the most significant changes made by SAFRA was cutting the Federal Family Education Loan program (FFEL), and switching all student loan originations to the Direct Loan program.
What this meant was that the government was taking out the middleman of private lenders in government student loans process.
Previously, under the FFEL program, the government paid three different kinds of subsidies to attract private banks into the middleman role (essentially the servicing of student loans backed by the government).
The first subsidy was a guaranteed interest rate, with the government covering the difference in interest payments whenever the student was paying below that guaranteed rate (which was most of the time even in normal economic conditions).
The second subsidy was another guarantee from the government, this time on virtually all principal and interest on the loan, completely covering the banks in case of any losses.
The last subsidy, the government completely funded guaranty agencies for various administrative services for the private lenders.
By cutting the FFEL program, and the private lender middlemen along with it, the government will save an estimated $61 billion through 2020.
The money wasn’t all channeled back into government coffers, though.
Some of the funds were directed toward additional student aid, such as paying for an increase to the Pell Grant scholarship award.
Still, the Congressional Budget Office (CBO) predicted that SAFRA would result $19 billion in net reductions over the ten years after its enactment.
There had been a substantial push for this change for years before SAFRA was passed on March 30, 2010.
However, there had always been a significant pushback from those “middlemen” loan servicers against it.
Consequently, it was widely lauded as a great accomplishment by student loan reform advocates.
Of course, anyone that has been reading the headlines in the past several years may be aware of other issues involving student loans and higher education costs (the recent lawsuits against several law schools by their respective alumni are such an example).
In fact, many are predicting that student loans, thanks in large part to the ever increasing cost of higher education, will be the next economic bubble to burst.
As such, SAFRA very likely isn’t the end of student loan reform efforts by the government.
Whether additional reforms are made before or after the “bubble” bursts remains to be seen, but more reforms like SAFRA are sure to come nonetheless.