The Cost of College: Relief is in Sight

At last we get a little good news. The new Congress is presenting to the President a package of legislation designed to help working families afford the skyrocketing cost of college. He’s threatened to veto it but we’ll get to that later. Start with the good news.

Help is needed

• Last week’s Census data showed that median household incomes fell 2 percent between 2000 and 2006.

• The National Center on Education Statistics shows that public college tuition rose 37 percent over the same period. (The details are in our latest college affordability report.)

The stats show why families are scrambling so hard for college. Use our spreadsheet to push the numbers around to your heart’s content. My favorite finding: The cost of private college is 57 percent of a median household income. That means that if a family with two children wants to send both kids to private college, it costs 114 percent of the household income – leaving less than nothing food, clothes, medicine or the roof that makes it a “household.”

The last Congress hit students hard

The 109th Congress hit students hard. They raised interest rates on student loans and cut funding for grant programs. As we have documented in prior reports, they seemed to prefer banks to students.

• The behemoth Sallie Mae Corporation, manager of $123 billion in student loans, contributed $2.8 million to political campaigns between 1994 and 2006, two-thirds to Republicans.

• Sallie Mae’s profits nearly tripled from 2000 to 2006, from $500 million to $1.4 billion.

• A digression: The whole notion of Sallie Mae is obsolete. It was created in the 1970s by a government concerned to help children finance their educations. At that time, students looked like poor financial risks. Young in age, with little credit history and few personal assets, they were not attractive candidates for private-sector lending – certainly not for the large sums needed to finance a college education.

The federal government helped solve the problem by creating incentives for banks to lend. The Federal Family Education Loan Program (FFELP) guaranteed lenders a higher interest rate than the base market rate, ensuring a healthy profit on monies loaned. On top of that, the government guaranteed payment of principle and interest in case of default. For the banks, it was a win-win proposition: higher interest rates with no real risk. The Student Loan Marketing Association (Sallie Mae) was created to manage the money.

Now the market is mature. Well-educated, high-earning college graduates have proven to be excellent credit risks, and student lending has grown into a highly profitable industry that starts $85 billion in new loans every year. Sallie Mae spun off from the government and privatized. Formally registered as SLM Corp., Sallie Mae has one of the highest returns on revenue in the Fortune 500.

But the government still subsidizes the interest rate and guarantees against default. No wonder Sallie is so happy.

The new Congress asserts itself

The 110th Congress is about to send some changes to the President. The higher education package centered around HR 2669 and S.1642 makes these changes over the next five years (starting this October 1):

• Cuts interest rates on subsidized student loans in half, from 6.8 percent to 3.4 percent.

• Increases the maximum Pell grant by $1,090

• Forgives debts for students who work in the public sector for ten years

• Caps payments at 15 percent of discretionary income

• Reduces the “special allowance payment” – the obsolete and unnecessary (forgive me) incentive the federal government pays banks to lend to students.

The bill has many provisions that students have been asking for and banks have been fighting against. Many Republicans who voted to cut grants and increase interest rates in the 109th Congress have changed their positions and voted with the new majority.

The President has promised to veto this bill … though it passed both chambers with veto-proof majorities, and tampering in conference committee might give him room to agree.

This is one of the first, direct challenges of the new Congress to the president. If he vetoes it, he’s really on his own. If he signs it, it might give the new majority the gumption to challenge him on other issues.

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