The banking credit crisis of 2008 highlighted the issues of students and parents becoming limited in their options for both obtaining and repaying student loans. Scrutiny regarding misuse of governmental loan subsidy funds by lending institutions and for-profit colleges was occurring. Student debt loads were at an all-time high. High unemployment meant students could not make payments on the loans and were defaulting at record rates. The Student Aid and Fiscal Responsibility Act (SAFRA) proposed in 2008 and passed in 2009 rewrote student financial aid rules in a positive way and outmoded the ineffective old student loan system. Lending institutions and for-profit colleges lobbied hard to block the forward progress of SAFRA based on the claims that the government was creating a monopoly on student loans and was creating a further loss of jobs in the lending industry. At no point in the lobbying were the following student loan issues mentioned: the misuse of subsidy dollars, the growing number of students unable to pay on their loans, or the large loan default rates the for-profit colleges were causing. The issues of subsidy dollar abuse, the possible monopoly of loans, claims of possible job losses, ability to obtain loans, loan defaults and loan forgiveness concerning the old loan program are reviewed below to state why the old loan program had to end.
A Short History of FFEL
The Family Federal Education Loan (FFEL) was a program started by the government back in the 1960’s. FFEL’s subsidy program gave funds to banks, other lending institutions and for-profit colleges so student loans would be more affordable. Lending institutions would receive the subsidy funds and, in turn, loan dollars to students enrolled in colleges. The lending institutions could use the subsidy funds at their discretion.
Once a student left school, dropped to less than half-time enrollment or graduated, the student would receive notice to begin payment on their loan(s) to the lending organization(s). If the student would default on the loan(s), then the Department of Education (DOE) would repay the loan(s) plus interest to the lending organization(s).
Change Can Be Good
The movement for change began during the banking credit crisis of 2008, which highlighted the lending industry’s abuse of loans and loan subsidy dollars. Occasionally, lending institutions would give subsidy dollars to schools in exchange for recommendations (which was against the law) or use the dollars as bonuses for lending institution executives. As lending institutions lost the financial capital to stay afloat, the lenders quickly stopped participating in the Family Federal Education Loan program (FFEL) and began selling their student loans to the Department of Education (DOE). As students defaulted on loans still held by lending institutions the DOE, which guaranteed the student loans, paid the lending institutions for the value of the loans plus the interest. The lending institutions were not...