Some banking industry experts have long regarded the federal student loan program, established in 1965, as one of the most successful public-private partnerships ever created. A historically steady and reliable source of financing for parents and college students needing help paying for school, the federal student loan program also used to be a mostly risk-free and profitable venture for private lenders issuing government-backed student loans.
But all that changed, says Harrison Wadsworth, special counsel to the Consumer Bankers Association, when Congress passed the College Cost Reduction and Access Act in the fall of last year, tilting the storied partnership squarely toward the public side, as the bill positioned the government to assume a larger role as lender and manager of student loans.
The legislation, which was aimed at increasing college affordability, raised Pell Grant award amounts for low-income students and lowered interest rates on certain need-based federal student loans — but in order to pay for these measures without passing the cost on to taxpayers, the bill also cut $21 billion in government subsidies to private lenders of federal college loans and doubled the fees that lenders are required to pay the government for every loan they issue.
These subsidy cuts and the resulting unprofitability of federal student loans, followed by the “spillover effect” of the subprime mortgage crisis into credit-based private student loans, have pushed the student loan industry to the breaking point. Liquidity for new student loans is scarce, credit restrictions on private student loans keep tightening, news continues to break almost daily of major lenders that have suspended either their federal or private student loan programs or both, and public confidence in the availability of student loans is shaken, despite the government’s efforts to allay families’ and schools’ concerns.
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