Paying for College Might Be Getting Easier

by Fred Siegmund

Financing a college education may be getting easier.

It’s much needed, as the benefits of Federal Student Aid, especially the Federal Student Loan program, reached new lows by 2007. The amount of Pell grants to need-based students was frozen at $4,050 from 2003-2007, even though there were no controls on tuition.

Congress increased that to $4,731 in 2008, while President Obama is proposing $5,350 and cost of living adjustments for the coming years.

Other proposals and changes recently made will benefit students using the Student Loan programs. Student loans in the Student Loan programs are quite varied and include Perkins loans, Direct Loans (a.k.a. Stafford loans), and FFEL (Federal Family Education Loan) loans.

Two important benefits of the student loan program are a lower-than-market interest rate and the opportunity to defer loan payments until after graduation.

While the interest rate on Perkins loans has continued to be 5 percent, Direct and FFEL Loan rates are adjusted each year beginning the first of July. The 2002 academic year carried an interest rate of 4.06 percent and a loan fee of 3 percent.

The rate started up after that, reaching 6.8 percentĀ  — where it stayed until June 30, 2008. These are only for the need based subsidized loans. Non-need based loan rates reached 8.5 percent.

The Department of Education announced a lower rate of 6 percent from July 1, 2008 to June 30, 2009 with a cut in the loan fee to 2.5 percent. For the year ending June 30, 2009 need based student loans will have a 5.6 percent interest rate; after June 30, 2010 4.5 percent; after June 30, 2011 3.4 percent.

Federal student aid will have more student aid in the future.

A more ambitious proposal by the Obama administration will eliminate the Federal Family Education Loan program; this would eliminate private banks from lending to students with a federal guarantee against default.

Under the Obama proposal, the Federal Student Loan program will become a federal program with all loans directly from the federal government.

This is not a new idea. President Clinton proposed much the same thing in 1992. The appeal of the new proposal is the same as the appeal of the old proposal. The federal government would get the interest on the loans instead of banks.

When students graduate, their principal and interest payments can be reused to make more loans in a self sustaining program.

As you could probably guess, the banking industry does not like the proposal. A federal guarantee of principal and interest on billions of dollars in loans with interest rates of 6.8 percent is quite a nice subsidy.

In 1992, President Clinton got a direct loan program, but private bank lending continued with it. The interest and principal payments went to federal deficit reduction instead of maintaining the student loan program.

Some changes are badly needed because students are taking on debts so big it’s like getting a home mortgage without the home. With the banking system in such low regard, maybe the politics is right and the Obama administration will succeed where the Clinton Administration failed. Time will tell.

Fred Siegmund covers America’s jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at

Previous post:

Next post: