New Math For College Loans

The House Committee on Education and the Workforce, working to meet deficit-reduction goals set by the Republican leadership, has approved a bill that could take a significant bite out of government-subsidized student loans.

There is no way of knowing at this point how much, if any, of the bill will actually become law, but its progress is something that families expecting to depend on student loans for much of their college expenses -- and that's just about everyone -- should be watching.

The measure comes as other federal education-assistance programs, such as the Pell Grant program for low-income students, are being held flat in nominal terms, and therefore are shrinking after inflation is figured in.

"It is our sense that the federal student-aid programs are careening toward some sort of calamity here," David L. Warren, president of the National Association of Independent Colleges and Universities, an organization of private colleges, said last week.

The education panel's bill would produce savings for the government of about $15 billion from the student-loan program over five years, leaving lenders to grumble that, overall, student loans account for less than half of 1 percent of all entitlement spending but 30 percent of all the spending cuts being proposed by the House.

Total federal financial assistance for "post-secondary" students is more than $67 billion this year, according to the Education Department.

The bill would raise revenue largely in the form of additional fees on lenders. So in most cases, the impact on students would be indirect, depending on the extent to which either the fees can be passed on or lenders leave the market or find other ways to squeeze borrowers.

And for those entering college in the next few years, there is a benefit of sorts: The bill would increase the maximum that freshmen and sophomores would be allowed to borrow under the federal program, to $3,500 (from $2,625) and $4,500 (from $3,500), respectively.

However, the limit of $5,500 for third and later years would remain the same, as would the overall loan limit of $23,000, meaning that students who find they need a fifth year to finish, and many do, could see their borrowing ability limited in their final year.

Other provisions in the bill would give borrowers a choice between a variable or fixed interest rate when they consolidate student loans. Rates on consolidated loans are fixed under current law, under a formula that created very low rates last summer, triggering a rush to consolidate.

But it also imposes a variety of fees on lenders in the guaranteed student loan program. Lenders say that marketplace competition makes it likely that they will end up paying most of these, but they also contend that such an outcome, which would reduce profit margins, would drive many lenders out of the business.

Educators are complaining that these cutbacks, along with limitations already in place, are making it tougher and tougher for both students and colleges. Students and their families have to dig deeper and borrow more, while colleges try to fill the void left by federal cutbacks with their own money, a move that creates budget pressures of its own.