Federal Subsidies to Private Student Loan Lenders Cease

Students who are currently seeking information about loans for college are likely to come across the message from many lenders that they are currently not funding college loans. Rather confusingly not all lenders have updated their information to include this message. However as of 7/1/2010 federal government subsidies for  student loans through private lenders, often state based, will cease.

Obama’s health care legislation includes student loan legislation which will stop private lenders receiving government subsidies to provide and administer federal student loans. The Federal Family Education Loan Program (FFELP) has been in operation for 40 years and gave students the opportunity to shop around for the best deals on their federal loans.

Federal subsidies allowed the lenders to pass on incentives to students and made the federal student loan market more competitive for students. The government in turn guaranteed the loans and 95% of a defaulted student loan balance was paid to the lender of a federal loan by the government. The bill has been rather rushed through as it is estimated that the government issuance of federal student loans will become backlogged leaving it more difficult for students to obtain federal loans in time for college.

Though the years many allegations of corruption have been levied against some state private lenders abusing the federal subsidies they receive, yet many accused continued to operate. The subsidies will now cease and the government aim is that the subsidies will instead be used to provide greater financial aid to low income students who desperately struggle to meet the costs of a college education, often their first step out of poverty. More grants and financial aid packages will become available state wide and the cessation of subsidies to private student lenders is expected to save taxpayers billions of dollars.

Students have often typically used a private state lender as the provider of their federal student loans as well as private student loans. Those searching online for loan providers are likely to become confused as the messages which the loan corporations add to their web sites mostly only state that they are no longer providing student loans, without explaining why. Some lenders state that the current economic climate is the reason, instead of issuing the message that they are no longer able to issue the loans. It is apparent that many lenders are hoping the new policy will be reversed and are waiting for the administration of federal student loans to collapse in disarray under the new policy.

The best advice to students is to make FAFSA applications as early as possible and to seek out new state grants which are being introduced and may well lower the overall level of borrowing through loans they need.