Big Banks May Be Locked Out Of Student Loan Subsidies

September 24th, 2009 by Reed Allmand

According to an article in Reuters, the U.S. House of Representatives approved legislation last week that would cut major banks and student loan giant Sallie Mae out of a large slice of the $92 billion university student loan business if passed by the Senate.  Under the bill H.R. 3221 –the Student Aid and Fiscal Responsibility Act of 2009, all new student loans would originate with the Direct Student Loan Program as of July 1, 2010. Many big banks and their supporters are lobbying hard to crush the legislation in the Senate so that it does not become law.  The legislation was inspired by the recent credit crunch that left many students unable to continue their education because of the lack of student loans available through private institutions.  If the new law is passed, student loans would not be affected by market functions because they would come directly from the government.

Many banks and their supporters are calling the move by legislators to eliminate government student loan subsidies for private banks, a “government takeover” that would negatively impact students needing money for school.  But the truth of the matter is that thousands of students were left without student loans in 2007 and 2008 because private banks were cutting back on their lending.  And it didn’t matter if the student had 3 years to go or only one semester. If the student loans are available directly through the government it increases the likelihood that students will be able to fund their entire education and remain unaffected by market issues such as the credit crisis. Please note that the new legislation will not impact the dischargeability of student loans in bankruptcy.  It will still be nearly impossible to discharge student loans in bankruptcy once the legislation is passed.