5 Myths About Student Loan Reform

For the past year, student loan company lobbyists and their allies have spread myths intended to kill common sense student financial aid reform and maintain a system of taxpayer handouts at the expense of students and families. With Congress facing critical votes on the reconciliation bill this week, the misleading messaging campaign has gone into overdrive. Here we present five of the most common myths and the real facts.

Myth 1: The reconciliation bill taxes students to pay for health care.

“Nine-point-one billion dollars of money created by the student loan takeover by the federal government is going to pay for health care. So it’s not enough to increase the taxes on these students when they get a job because that’s what will happen to them under this health care bill. It’s not enough to pass on $2 trillion of debt. That’s what happens when you look at this bill in perpetuity. You got to hit them while they’re in school. This stinks.” – Senator Lindsay Graham on FOX News, March 23, 2010

Fact:The bill will indeed take $9.1 billion of the $61 billion in savings from ending wasteful government subsidies to banks and use it to pay for health care reform. But for decades the banks have simply been putting these subsidies in their pockets, so it is bizarre and hypocritical for them and their allies to suddenly act like protectors of students. In addition, the funds saved by reforming student loans that is used by health care is more than offset by $13.18 billion in education investments paid for by the health insurance reform section of the reconciliation bill. <

Myth 2: Passage of student loan reform legislation will result in the loss of thousands of loan industry jobs.

“The student-loan provisions buried in the health care legislation intentionally eliminate private-sector jobs at a time when our country can least afford to lose them.” – Sallie Mae Spokeswoman Martha Holler, March 22, 2010

Fact: There will be no shortage of work for loan companies under the new reforms; all current loans under the old Federal Family Education Loan Program (FFELP) will still need to be serviced, as will all new loans made under the Direct Loan Program (DLP), and the same big lenders have already lined up for contracts to service new loans. In fact, student loan giant Sallie Mae has announced it is in the process of bringing back 3,400 jobs from overseas. These jobs are returning to the U.S., at least in part, so that the company can be eligible for Department of Education contracts to service Direct Loans. In addition, most loan companies today do more than make federal student loans. Many offer consultation services to schools, private student loans, collections services, and other products and services, and will continue to be in business and employing people for these activities after reform is passed.

Companies like Sallie Mae seem to be playing politics with jobs, frequently changing their job loss estimates, and exaggerating the impact that the legislation will have on their workforce. Opponents of reform have claimed that 30,000 to 35,000 private sector jobs would be lost, but this is a very rough estimate of the total number of jobs that are involved in the FFELP program. No one seriously believes that job losses—even in the worst possible estimation—would approach this figure.

In addition, the bill’s investments in community colleges and minority-serving institutions, made possible by ending the lender subsidies, will save and create jobs. And by expanding educational opportunity, the reforms will enable more young people to gain the skills and experience necessary to enter the workforce, thereby creating more jobs and strengthening the economy in the long term.

Myth 3: Student loan reform changes mean that students will be charged higher interest rates.

“Rep. Howard P. ‘Buck’ McKeon, R-Santa Clarita … described the elimination of private federal lending as a government takeover of the student loan system. A statement from his office said some schools are not able to afford the switch and that the change could increase interest rates.” The San Bernardino Sun, March 18, 2010

Fact: Interest rates on federal student loans are set by Congress, and the reconciliation bill will not change the interest rates that students are charged. This bill will reduce monthly payments in the Income Based Repayment program, however. Currently, federal student loan payments can be capped at 15% of a borrower’s monthly discretionary income, and loans can be forgiven completely after 25 years. If the reconciliation bill passes, these numbers will be reduced to 10% and 20 years respectively, so it would actually make college loans more affordable for students in the long run.

Myth 4: Student loan reform will eliminate student choice.

“Gone will be the days when students and their colleges picked the lender that best fit their needs; instead, a federal bureaucrat will make that choice for every student in America based on still-unclear guidelines.” – Senator Lamar Alexander, op-ed in The Washington Post, March 7, 2010

Fact: In the current system, students don’t have a true choice; they have the choices their schools provide for them, which, as investigations by the New York Attorney General’s office and others have shown, have sometimes in the past been secured through kickbacks, improper inducements, and other nefarious tactics.

In fact, lenders are offering virtually identical rates on student loans, and neither schools nor students are in a good position to know how different companies will service their loan. Student loans may also be sold off to other companies (a practice the reconciliation bill would end), so schools and students are often not in the position to even know which company will service their loan.

You don’t have to take our word for it: Listen to Don Goldman, a partner with Qorvis Communications, which coordinates a lender-funded campaign against student loan reform called (ironically) Protect Student Choice. In an interview with Campus Progress, he said the campaign is about “making sure schools and universities have their choice of who they want to be getting loans from,” though he admits that, despite the premise of student choice in the campaign, students “are sort of stuck with what the schools decide.”

Trying to make this debate about “choice of lender” is simply part of the lending industry’s orchestrated attempt to make this debate about everything except what it’s actually about: college affordability.

Myth 5: Student loan reform is just another government takeover

“The federal education takeover is another example of the Democrats’ willingness to use whatever tactics are necessary to advance their agenda to concentrate power in Washington—while they still can.” Wall Street Journal Editorial, March 8, 2010

Fact: Both the DLP and the FFELP are already government programs, administered by the Department of Education. Congress sets eligibility rules, maximum interest rates, subsidy rates, rules to help prevent conflicts of interest, rules about bankruptcy and default, minimum deferment and forbearance options, and more. You can’t “nationalize” something that’s already directed and secured by the government. What you can do is simplify the system and eliminate fraud and waste so that money saved is going to needy students, not bank CEOs.

Katie is the Communications and Outreach Manager for Campus Progress.

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