I was reading the paper today and the house is set to vote on their version of the health care bill.  The next story was talking about expanding the control the fed has over large financial firms.  You see the climate in America has shifted to the government taking control and make sure we all play nice together.  Enough about politics, I’m feeling dirty.

The push is on to pull the student loan responsibilities from the private sector and handing it over to the federal government.

A lot has happened over this past year and it’s natural for people to be searching for a change.  The fact of the matter is we need balance.  The Federal Government has been subsidizing private lenders for years.   In the past the government felt the market could more efficiently handle itself.  Recently the House of Representatives has voted to stop this practice and the Senate is due to vote soon.

18 months ago there was a lot of uncertainty about the credit market.

Many of the private student loan companies just left the business.  There was a lot of concern about the availability of the Federal Family Education Loan (FFEL) program loans for the 2008-2009 academic year.  Congress, in this case, acted quickly and provided the Department of Education temporary authority to directly finance loans made through the FFEL program lenders.  These loans are called Direct Loans.  These were not free goverment grants but loans.  The goal was to protect the students and universities to make sure if a lender did go out of the business there would be loans available for the students for college tuition help.  This I applaud!!

The Education, Secretary Arne Dunan, has taken it upon himself to send a letter to colleges asking them to prepare to use the government’s direct loan program.  Even President Obama is sounding in by pushing for 100 percent direct loans.  My guess this will happen during the term of President Obama.  I don’t agree that the Education Secretary should be sending a letter to push the government loan program.

So what does this all mean to you?

Probably not too much.  As long as there is money in the system, to underwrite the loans, you don’t have anything to worry about.

I’m not going to get into the pros and cons and the politics of this debate.  They run deep and there are definitely pros to the 100% Direct Loan program and conversely there are pros and cons to the Private sector loans.  We all know this to be true, absolute power corrupts absolutely.  No one person or group should have absolute authority over this or any process.  I would caution switching completely to a Direct Loan Program.  The private sector would make loans to people that otherwise would be hard-pressed to get a loan.  I.e. .convicts and people with poor credit.  One con for the movement to a direct loan system is that these direct loans cannot be discharged in a bankruptcy.  We don’t want to encourage a bankruptcy but sometimes things happen like loss of job or medical issues.

I also do not expect the interest rates to go down from their current level.  Right now, depending on the loan, you could expect around 6 to 6.5% interest rate.  Even though the government can borrow more cheaply (at least until inflation), I don’t think the savings will be passed onto us because we are at a record deficit.

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