In order to save the student-loan market, the U.S. Education Department announced recently that it would temporarily pay lenders a higher subsidy rate on loans issued through the guaranteed student-loan program since 2000. This move will allow banks to raise their subsidy rates and will stop banks from dropping out of the market.
The truth is that banks make little to nothing on student loans simply because these loans do not bring in large sums of money like entrepreneurial or mortgage loans do.
In September 2007, former President George W. Bush, pressured by Congress, signed the “College Cost Reduction and Access Act” into law. “Which meant that the small profit lines that banks made in the student-loan programs became almost non-existent,” Mike Colahan, director of financial aid, said.
“Banks only exist to make money . they got into this more than 40 years ago because it was good PR.” Banks, in lending to college students to pay tuition, not only strengthen the U.S. college education system, but also increase the likelihood that those students after college will continue business with the banks and open new accounts.
“In some ways they’re selling the field by being in this federal loans program, but they are not making a lot of money off it,” Colahan said.
With the current economic crisis, some critics may see the raising subsidy rate on student loans as a form of “bail-out” to the loan program. “Even if we weren’t having a lending crisis right now, you would still see a lot of banks dropping out of the program because the government had cut their subsidies off,” Colahan said.
Much of the mainstream media still see this as a victory for the Education Department during a time of brutal economic crisis, “but once in a while I’ll read an article from someone who has enough knowledge to say ‘they’re just fixing the damage they did a year ago.’ They never should have cut the subsidies to begin with.”
There are two main student-loan programs, the Federal Family Education Loan Program, and the direct loan program. The direct program was made during Clinton’s administration in order to cut out the middle man, the bank.
Democrats, such as senior Sen. Ted Kennedy, have always pushed the direct loan program, “but the direct loan program has never been as good as the federal loan program, which uses different banks. When you have different banks involved, you have a level of competition; and who benefits from that? The student,” Colahan said.
Cabrini College’s financial aid department usually pushes students to borrow from FFELP because in this federal program, private banks have to compete by lowering its subsidies and offering what Colahan calls a “sweeter” deal.
In a time when more students than ever are losing their loans as banks drop out of the student-loan market, the financial aid office is more than willing to help students find a bank that will work best for them. “Even though we don’t have a preferred lender list, we can still direct you, we can say, ‘look into this bank and then look into this bank and you decide what you want,'” Colahan said.
The Cabrini College Financial Aid Office is located in Grace Hall across from the admissions office.