Lions and Tigers and Bears!

Yesterday, President Bush signed into law the College Cost Reduction and Access Act—legislation that increases Pell Grants, cuts interest rates on student loans, expands loan forgiveness, and pays for it all with cuts in government subsidies to student loan companies. The headline of the Chronicle of Higher Education article about new legislation read “As President Bush Signs Bill Increasing Student Aid, Several Lenders Announce Cuts in Staff or Benefits.” The article also cites concerns that reduced subsidies to loan companies will result in a decline in the number of small lenders participating in the federal loan program.

…banks leaving the business, layoffs, and benefit cuts…oh my!

But before you shake your head that this bill is destroying the federal loan program, you have to ask: Is the purpose of the federal loan program to create a profitable banking industry or is it to provide financial aid to students?

The College Cost Reduction and Access Act answered this question, or at least it provided the Democrat’s answer: the purpose of the loan program is to give aid to students. Yes, reduced lender subsidies may mean that loan companies need to run a leaner business, but it also means that more taxpayer money for federal student aid will make it directly to the students, bypassing the loan companies as middlemen.

As I wrote a few weeks ago, the threat of reduced borrower benefits, while real, isn’t as problematic as loan companies would like you to think. First, very few students receive the full amount of these borrower benefits, and second, this money isn’t being taken away from students, it is being reallocated. The money is going to increased Pell grants and reduced interest rates, rather than given to loan companies as profit that they can then pass along to students as “benefits”.

Overall, this legislation does a good job of directing aid money where it is needed--need-based grants and relief from student debt.