Who Owns Student Loans?

Loans are the primary resource of financing higher education, and the annual student debt average continues to escalate. According to The College Board, the average debt for a graduate with a bachelor's degree is now $12,400. Consequently, becoming educated on who controls the lucrative business of financial aid is increasingly important.

History

The first student loans were funded directly from the U.S. treasury under the National Defense Education Act of 1958. At this time direct loans from the government were recorded in the budget as losses, while private loans the government subsidized (also called guaranteed loans) were only recorded as losses if the lender defaulted on a payment.

These accounting rules led to the formation of what is now known as the Federal Family Education Loan Program (FFEL), which provided students with guaranteed loans from private lenders subsidized by the government. However, in 1990, the George H.W. Bush administration revised the standards that recorded direct loans as monetary losses. In 1993, Bill Clinton developed a plan for direct loans to compete with private loans. But despite these structural changes, federal and private lenders still operate largely under FFEL, and both therefore share ownership of student loans.

Federal (Direct) Loans

Federal direct loans are given directly to the borrower from the government. Some federal loans are subsidized, meaning they have no interest rates for the individual borrower. Other loans are unsubsidized, meaning the loan accrues interest while the borrower is still in school. The Federal Direct Student loans, which are funded directly by the U.S. Treasury Department, are a current example of direct federal loans.

Federal (Guaranteed) Loans

Federal Family Education Loan Program loans are funded by private lenders and subsidized by the government. The carry virtually no investment risks because even if the student defaults, taxpayers must pay back 97 percent of the loan.

The U.S. government decides who is eligible for both direct and guaranteed loans. The amount given to a borrower is contingent on the level of financial need. Congress also determines interest rates and writes subsidies into law. In guaranteed loans, lobbyists for private investors petition for the highest subsidy possible from the U.S. government.

Private Loans

Private lenders are usually banks and corporations. Some major private lenders include Nelnet, WellsFargo, Sallie Mae, Citibank and Union Bank.

Lenders' profits come from the interest rates of a loan. In contrast to federal loans, private lenders' interest rates are generally determined by the borrower's credit history. If the individual has a poor credit history, interest rates will be higher and vice-versa.

The Current Debate

President Barack Obama has proposed getting rid of FFEL and offering only direct loans from the government. Because taxpayers must pay when students default, he believes cutting out the middleman (private investors) would eliminate this expense. Recently, some corruption issues have surfaced with private lenders. In one Maryland school for instance, the lender Nelnet gave a $50,000 donation for the school to promote them as a preferred lender.

Obama's reform plan was introduced to the House of Representatives in July 2009 and will be taken to the Senate in spring 2010 alongside the health-care reform bill.

References

• Pros and Cons of Obama's Reform Plan
• Rolling Stone's Political Writer Cites Problems With Private Lenders
• Research Group Offers Ideas on Restructuring Financial Aid

Resources

• Federal Information on Student Loans
• Latest Statistics on Student Debt and Loans