Banks that offer federal student loans are raising fees and taking away discounts to recover some of the money they'll lose because of the new terms imposed by the College Cost Reduction and Access Act. As a result, student borrowers may not see as big a break on their loan repayments as Congress had intended with the legislation.
The bill, signed into law by President Bush on Sept. 27, raises the maximum Pell grant to $5,400 and cuts Stafford loan interest rates from 6.8 to 3.4 percent by decreasing subsidies to private lenders.
The decrease in federal interest rates on Stafford loans will be "paid for by taking $21 billion over the next five years from lender profits and redirecting it to student aid," said Mark Kantrowitz, publisher of finaid.org. "I see this as a net win for the students."
"Banks are reacting by cutting the discounts they give to students," Kantrowitz said. The cut in federal subsidies to the lenders will lower their profits, he explained, so they must find ways to stay profitable in the financial aid market.
Previously, some lenders offered a one-percentage-point reduction in interest rates for students who paid on time for 36 months. Now some firms are cutting that benefit to .25 percent for students, and in some cases, they are only offering the incentive to students who transfer funds online, Kantrowitz explained.
Still, only 20 percent of students were making the first 36 payments on time, Kantrowitz said, adding, "The discounts were more apparent than real."
"Three years from now, they're going to have to find some other way to cut costs," Kantrowitz said of the lenders.
Because the University is a direct lender and participates in the Federal Direct Student Loan Program, most Brown students should be unaffected by the banks' cut in benefits for private borrowers, according to Director of Financial Aid James Tilton. As a direct lender, Brown grants "federal student and parent loans directly from the federal government," Tilton wrote in an e-mail to The Herald.
Still, approximately 260 students at Brown could be affected, since 4 percent of undergraduates borrow privately every year, Tilton wrote in an e-mail to The Herald. "We don't really have a preferred lender list," Tilton said, but there is "a list of four or five lenders that we've had relationships with in the past."
Most Brown students who are granted financial aid - 1,925 undergraduate and 460 graduate and medical students - received Federal Direct Student Loans this year.
Students who borrow using unconsolidated Stafford loans will also see their discounts cut, Kantrowitz said.
Regarding the recent legislation, Tilton sai, "It can't help but change the industry." He said he expects lenders to look at their customer base to see what they can do to stay profitable.
The most prominent change Tilton expects to see in the loan industry is "growth in direct ... marketing." The Office of Financial Aid will have "to be diligent about finding out ... what kind of information" students are getting to make sure they borrow wisely. "Many different loan products will come out of this legislation," he said. "The market is going to change."
"Private student loans are more expensive than federal student loans," Kantrowitz said, so students should exhaust their federal eligibility before turning to private lenders.
"I don't think it's going to end up hurting students," Tilton said. He emphasized that students need to be cautious as more private loans become available. "Students should be very aware of what they're getting into."
