The Washington Post has an interesting article about the Democratic candidate’s various student loan proposals (I’m trying to find a similar summary of Republicans – if you find one, please post the link in the comments and I’ll devote a post to it.) Read the excerpt below.

Parsing Candidates’ Student-Loan Proposals

Top Democrats Would End Subsidized Commercial Loans; Government as Sole Provider

By ANNE MARIE CHAKER

The front-running Democratic presidential candidates are pushing a simple idea they say will make college loans more affordable: cutting out the middlemen. And the middlemen — primarily, commercial banks and lenders — are none too pleased.

This month, New York Sen. Hillary Clinton issued her plan to make college more affordable through a range of proposals, from creating a new tuition tax credit to simplifying the aid application process. Buried at the bottom of her plan is perhaps the most radical step: A pitch to eliminate the Federal Family Education Loan Program, which gives subsidies to commercial lenders such as Sallie Mae to distribute federal loans to students.

Months earlier, former North Carolina Sen. John Edwards and Illinois Sen. Barack Obama made similar proposals to eliminate the FFEL program.

Such a move would leave the government’s alternative lending option — the William D. Ford Federal Direct Loan program — as the sole provider of federally supported student loans. The Direct Loan program allows students to borrow directly from the federal government through their school’s financial-aid office.

The loans that students get from either program do not differ in terms of interest rates or the amount that can be borrowed. So the argument for eliminating FFEL is that students could get the same amount of financial aid at essentially the same terms, while saving taxpayers money by eliminating the need to subsidize the commercial lenders.

Commercial lenders, however, assert that students benefit from the public subsidies to their industry. For one thing, the FFEL industry says it offers far more incentives than the Direct Loan program does, rewarding borrowers for on-time payments with a slew of rebates and rate reductions. Many lending experts concede that few borrowers wind up qualifying for the incentives. According to student-loan giant SLM Corp., better known as Sallie Mae, less than 10% of borrowers earn all the advertised repayment benefits. But dissolving FFEL would also leave schools and students with no choice in federal loans, the lending industry says. (Students would still be able to go to commercial lenders for private loans that aren’t part of a federal financial-aid package.)

John Dean, special counsel for the Arlington, Va.-based Consumer Bankers Association, a group of student-loan providers, adds: “Not only are you going to eliminate competition, but there’s another factor: What if the system fails?”

For its part, the U.S. Department of Education says it is reticent to take on the added burden. “As the regulator of both FFEL and [Direct Loan], we want to ensure both programs stay healthy to better serve consumers. At a time when families need options, maintaining two viable loan programs is critical,” said Diane Jones, assistant secretary for postsecondary education.

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Here’s a very interesting article pointing out the inaccuracy of the Department of Education’s published student loan default rates. You see, the Department of education only reports on defaults within 24 months of graduation. Considering it can take up to 30 years to pay back a very large consolidation, does that seem stupid to anyone else? Read the whole article at Business Week.

Finding Fault in Student Default Data

Rates of student loan default are much higher than previously reported, according to a new study. And some borrowers bear a bigger burden

Nearly 10% of student borrowers default in the first four years after they graduate, according to a new study of education loans that suggests the federal government has taken too narrow a view when measuring repayments. Moreover, the likelihood of default varies drastically across racial lines with black and Hispanic graduates far more likely to default, according to the study, Hidden Details: A Closer Look at Student Loan Default, released by Education Sector, an education policy group based in Washington.

In September, Education Secretary Margaret Spellings announced that the student loan default rate had fallen from 5.1% in 2006 to 4.6%. But the Education Dept. data cover only the first 24 months after a student graduates.

Longer Term Paints Starker Picture

The new study, released Oct. 23, analyzes data collected over 10 years by the National Center for Education Statistics (NCES) of 1993 college graduates. Instead of examining just the two-year cohort rate, published yearly by the Education Dept. which looks only at student loan default in the two years following graduation, Education Sector expands the window to reveal a starkly different picture of loan repayment.

“The problem is far bigger than the rates provided by the U.S. Department of Education suggest,” says Kevin Carey, research and policy manager for Education Sector. “And the problem is much more substantial for certain kinds of borrowers.”

Extrapolating from the NCES data, analysts found that the default rate was much higher than the Education Dept. rate, around 9.7%.

Lenders Defend Lifetime Rates

The Education department stated that the two year cohort rate is mandated by Congress and didn’t elucidate the reasons behind that choice. Student lenders such as Sallie Mae (SLM) say they largely disregard the cohort rate, and choose instead to view the business and health of student loans and student lenders based on the lifetime default rate. In 2003, the Education Dept.’s Office of the Inspector General found that the smaller two-year look at default doesn’t actually reflect long-term default trends.

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This week the College Board release their annual reports about pricing and student aid.  Here are extracts from their press release.  You can read the entire release and the reports themselves by visiting http://www.collegeboard.com/press/releases/189547.html

… At public four-year institutions, in-state tuition and fees average $6,185, or $381 more than last year, a 6.6 percent increase. In 2007-08, average total charges (which include both room and board and tuition and fees), are $13,589, a 5.9 percent increase over last year. The average full-time student at a public four-year school receives about $3,600 in grants and tax benefits, which lowers the average tuition and fees to a net price of about $2,600.

Tuition and fees for out-of-state students at public four-year colleges and universities average $16,640, which is $862 more than in 2006-07 — a 5.5 percent increase. Average total charges (including room and board and tuition and fees) are $24,044, a 5.4 percent increase from 2006-07.

At private four-year nonprofit institutions, tuition and fees average $23,712, or $1,404 more than last year, a 6.3 percent increase. Average total charges (including room and board and tuition and fees), are $32,307 in 2007-08, which is 5.9 percent higher than in 2006-07. The average full-time student attending a private college receives about $9,300 in grants and tax benefits, which reduces the average tuition and fees to a net price of about $14,400.

At public two-year institutions, tuition and fees average $2,361, a $95 or 4.2 percent increase. The average full-time student in this sector receives about $2,040 in grants and tax benefits, lowering the average tuition and fees to a net price of about $320.

At for-profit institutions, tuition and fees average $12,089, or $703 more than last year—a 6.2 percent increase. The report documents increased enrollment over time at for-profit colleges. In 1995, 2 percent of full-time students were enrolled in for-profit institutions. Ten years later, that share had risen to 8 percent. The largest shift into the for-profit sector came from public four-year institutions.

Student Aid

In 2006-07, about three-quarters of full-time undergraduates received some form of financial aid. For the first time, “Trends in Student Aid 2007” reports separately on all forms of aid for undergraduate students. In 2006-07, undergraduate students received $97.1 billion in financial aid, 74 percent of total aid to postsecondary students. The two largest sources of aid to undergraduates are federal loans, which make up 40 percent of the total, and grants from colleges and universities, which comprise 21 percent of the total.

In 2006-07, almost 60 percent of Pell Grant recipients were independent of their parents. Among dependent recipients of Pell Grants, two-thirds came from families with incomes below $30,000. The average Pell Grant per recipient, which failed for the fourth year in a row to keep pace with inflation, was $2,494 in 2006-07. In 1986-87, the maximum Pell Grant covered about 52 percent of the average published price of tuition and fees and room and board at a public four-year institution and 21 percent at the average private college. In 2006-07, it covered 32 percent at a public four-year college and 13 percent at a private college.

Awarded for the first time in 2006-07, Academic Competitiveness Grants go to selected first- and second-year Pell Grant recipients. Eligibility is based on curricular and GPA requirements. In the first year of the program, 400,000 students received awards averaging $850. Also awarded for the first time in 2006-07 were SMART Grants, which go to selected third- and fourth-year Pell Grant recipients majoring in physical, life or computer science; engineering; mathematics; technology; or a specified foreign language. In the first year of the program, 80,000 students received awards averaging $3,875.

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Here’s an interesting opinion piece from the Saratogian about the politics behind the recent bills regarding financial aid.

College Bound: Financial aid gets political

By TOM MILLS, For The Saratogian

10/20/2007

With the national political scene swinging into high gear, families facing payment for higher education stand to benefit from a compromise version of a bill originally passed by the House of Representatives in July of this year. President Bush had said he would veto the original House bill, and had severely criticized the Senate version as well.

Last month, however, the US Department of Education announced that President Bush would sign, not veto, compromise budget reconciliation legislation that would tighten federal subsidies given to student loan providers.

The savings of about $22 billion would then be directed to increase the maximum federal Pell Grant to $5,400 (currently at $4,050) over the next five years and reduce the student loan interest rate by 50 percent over the same period. The move seemingly will avoid providing the Democrats with the campaign ammunition that the president had protected the excess profits of “fat-cat lenders” at the expense of American families.

Samara Yudof, a spokeswoman for the Education Department, said that Education Secretary Margaret Spelling had worried that the compromise bill would spend about $1 billion on new entitlement programs and that the interest rate cuts would end after four years, “pushing tougher fiscal decisions into the future … an irresponsible way to make policy.”

However, Yudof said that the secretary ultimately advised Bush to sign the bill, as it “answered the president’s call to significantly increase funding for Pell Grants.” The Democrats quickly scoffed the idea that the Bush Administration deserved any credit, citing the sponsors as senators Edward Kennedy of Massachusetts and George Miller of California in what Democratic leaders called the largest infusion of federal student aid since the GI Bill.

The bill also seems to make good on a campaign promise made by the Democrats last November to make college more affordable to every qualified student. Most of those promises surrounded the federally backed student loan interest rates, which now stand to be cut from their current rate of 6.8 to 3.4 percent over the five year period by this bill.

I prefer to think of this as a bipartisan step in the right direction, hopefully the first of many needed to truly keep college costs affordable to everyone. Most families do not qualify for Pell Grants, and current borrowing limits on federally backed Stafford loans compared to the total cost of college make them a small percentage of the financing picture for those who qualify.

The bill does, however, provide some relief and indicate that both sides of the aisle are aware of the significant associated costs and the growing problems facing families trying to provide higher education for their children. Both are a good start, no matter whose ideas they are.