With a new administration and political party in the Executive Office, analysts are waiting for expected changes in the student loan industry that could emerge in the coming months. Some speculate that the private sector will be fully re-invited to the student loan game, completely nudging out the federal direct loan program.
It has been common speculation that President Trump and the Republican-led Congress will begin scaling back the federal role in student lending. Many politicians that opposes the Department of Education and federal involvement in education support re-introducing private banks to the student loan industry for the first time since the financial crisis.
“That’s good for consumers,” said Nate Matherson, co-founder and CEO of LendEDU, an online marketplace for student loans and student loan refinancing. “More competition between lenders ultimately means lower rates for borrowers for those individuals who don’t have private student loans.”
Despite the hope for lower rates, the more immediate change that student borrowers can likely expect is a rise in interest rates. Economists predict the Federal Reserve will raise interest rates two or three times in 2017. Although private student loans would be linked to the London Inter-Bank Offer Rate (LIBOR), LIBOR tends to move in line with U.S. rates. Interest rates on both federal and private loans would increase regardless of the federal role in student loans.
Further relying on the private sector for aid, income-share agreements may gain popularity as a student loan alternative as well. Republican Senators Todd Young of Indiana and Marco Rubio of Florida recently introduced a bill to create a legal framework for Income-Share Agreements. An income-sharing agreement (ISA) provides access to funds from an investor towards schooling. There is an agreement to pay back the loan based on a percentage of future income for a set period of time after graduation.
Upon introduction, Rubio stated, “This innovative legislation would empower students to leverage their future income today and access the financial resources of businesses, individuals and nonprofit organizations in order to achieve their higher education goals.” Senator Young added, “Income-share agreements are an innovative debt-free financing option for students.”
These changes are in response to an increasingly serious concern with student debt and the cost of higher education. Under the last administration, former U.S. President Barack Obama stopped giving subsidies to private student loan lenders under the Student Aid and Fiscal Responsibility Act. The Department of Education took over student loans as the sole originator of loans. Since then, student loan debt has grown each year and now surpasses $1.3 trillion.
The election of 2016 revealed the insecurity and uncertainty of the public on the issue of student debt, and multiple politicians came forward with their solutions to the mess. Senators Marco Rubio and Todd Young are a part of this political movement, but there are other efforts from the other side of the party line. A couple of the most popular initiatives included Sen. Bernie Sanders’ free college proposal and Sen. Warren’s push for federal student loan refinancing.
Given the new leadership in the White House as well as the Department of Education, proposals relying on the federal government may not gain the necessary traction in Congress. At any rate, the current political atmosphere is sure to persist for two years minimum before congressional elections take place once again.
Author: Andrew Rombach
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