In an effort to help save money and increase college attendance and graduation rates, President Barack Obama is proposing to change the way student loans are distributed nationwide.
Obama’s plan, included in his budget proposal, would end the Federal Family Education Loan Program in exchange for more direct lending to students by the federal government.
Under the current FFEL program, private lenders receive a government subsidiary for every student loan they make, though the loans are still guaranteed by the government. Therefore, even if a student defaults, the bank will still receive a return on their investment.
According to Obama, the banks, serving as the “middleman” are wasting billions of taxpayer dollars each year.
“According to the Congressional Budget Office, the money we could save by cutting out the middleman would pay for 95 percent of our plan to guarantee growing Pell Grants,” Obama said in a speech at the White House Friday, according to The Associated Press. “This would help ensure that every American, everywhere in this country, can out-compete any worker, anywhere in the world.”
Secretary of Education Arne Duncan said the president’s plan will increase funding for loans and other incentives by $2.5 billion over the next five years, while indexing each loan to a rate slightly above inflation.
At the University of Wisconsin, students who receive financial aid do not get it directly from the government, but rather from banks backed by the government, according to Susan Fisher, director of student financial services.
If the president’s proposal passes and all federal loans are made direct loans, Fisher said she is confident students at UW won’t suffer as a result of the change.
In addition to changing the way student loans are administered, Obama’s budget proposal would also change the way federal Pell Grants and Perkins loans are distributed.
The president plans to increase Pell Grant funding by $500 next year, raising the maximum award amount to $5,500. Obama also hopes to change the way the value of a Pell Grant is determined.
Currently, the grants are determined each year by Congress. Obama’s proposal would index the grants at a rate slightly above inflation each year to alleviate Congress from its annual duty.
Fisher said she anticipates an increase in requests for student loans next year due to the large number of students’ families that are struggling financially.
Overall, however, Fischer said she is pleased with the president’s proposal to change the way financial aid is distributed to students.
“I love what he’s doing with Pell Grants … trying to get more,” Fischer said.
But Fischer said she does not agree with the president’s plan to change the way the Perkins Loans Programs are distributed.
Under the current Perkins programs, students who have previously received a Perkins Loan repay their loans into a fund that provides the money for those students currently receiving a Perkins Loan.
