College Cost Reduction Act of 2007, A Sad Disappointment!

28 Sep College Cost Reduction Act of 2007, A Sad Disappointment!

Congress just passed The College Cost Reduction and Access Act of 2007. The name suggests that Congress has finally done something about the building crisis in student loans. Media sound bites may give this impression, but in reality this is nothing more than a smokescreen hiding those still stoking the fire.

A recent post (New Student Loan Law Provides Welcome Relief) announces this new legislation and gives justifiable thanks for the meager benefits extended to students by this new legislation. However, a close examination of the Act shows most provisions concerning student loans to be of little benefit to the borrower. Several sections seem aimed more at guaranteeing lender profits and ensuring a steady stream of newcustomers than at providing meaningful relief for beleaguered debtors.

The reduction in interest rates on federally guaranteed loans made after July 1, 2008 (if repaid scrupulously thereafter) does nothing to relieve existing debtors. The bill appropriates no funds for subsidizing interest rates, although it is plain that no private lender would fund loans at less than the market rate unless some direct subsidy was available. Thus the interest reduction provisions represent an unfunded mandate whose implementation is thrust upon the shoulders of a future administration.

Subsidies for teacher education and promises of forgiveness of unpaid debt for borrowers in certain low-paid public service occupations assume that graduates will be able to find permanent full-time employment in their chosen field and that the principal barrier to pursuing careers of this nature is the cost of education. The graduate who cannot find a permanent job in a chosen field finds that the grant has suddenly become a loan that must be repaid. This looks like just one more example of lenders and educational institutions holding out unrealistic expectations of postgraduate career success in order to drum up business.

Income-contingent repayment plans, retitled Income-based repayment, figure prominently in HR 2669. They are a bad deal for everyone except the lender. They set a repayment amount of 15% of the difference between a person’s gross income and 150% of the Federal poverty level. If that payment is less than the accruing interest, the interest is capitalized, allowing the amount owed to rise steeply over the 25 year income-contingent repayment period. The debt thus becomes a time bomb for the borrower if his or her finances ever improve and a public burden if they do not.

Other provisions of the bill reduce the special allowance payment (guaranteed yield) to lenders on Stafford loans, but raise the amount of origination fees that can be charged to the borrower, and establish a pilot program for competitive bidding on PLUS loans (loans to parents). That pilot program looks suspect as a service to students or their parents. It appears to allow the award of a lending contract based on the amount of profit guaranteed to a lender. It may cut costs for the government but provides no discernable benefit to the borrowers.

All in all, this bill looks more like an elaborate scheme to rearrange the deck chairs on the Titanic than a meaningful attempt to craft a just, fiscally sound solution to the present student loan morass. Much more must be done if we are to avoid the creation of a permanent underclass of student loan serfs indentured to pirate lenders.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.
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