Debt Free

In a move that could surely affect your finances if you're either in college, or have a dependent for whom you'll be footing the college bill, Congress passed revisions to federal student aid programs by a margin of 273 to 149. What's changed?

They have eliminated over $19 billion in federal subsidies to loan providers. Despite 11^th hour appeals to congress by lobbyists, the deal passed by a fairly wide margin. Under the new plan, lenders will exist in a competitive environment, having to actually bid for loans in government auctions. Lenders who accept the lowest subsidy amounts will win the loan contract. It's kind of like Lending Tree for student loans. The loan auctions are separated by geographic regions and educational institution. Lenders have been under fire in recent years for several practices, including the offering of cash and other incentives to educators and institutions in exchange for business. It seems they have a system similar to that of the lobbying industry and congress. Perks for props or therabouts.

The $19 billion will instead be used to cut student loan interest rates and subsidize the college education of low income students. Bush has threatened a veto, but earlier this year, the Bush administration proposed $16 billion in subsidy eliminations, with the savings to be used for similar purposes. His reasons for the veto threat? The president would like to see more direct funding for student grants. In addition, he feels the new program will set up more expensive government programs. Amazingly, Congress doesn't seem worried about more expensive, government programs. In Feburary, President Bush approved an approximate 5% increase in the Pell grant maximum award, the first such increase in 4 years. Doesn't seem like the Pell Grant program has a COLA provision, does it?

Sallie Mae (SLM) is the country's biggest student loan provider, and has been in negotiations for a buyout deal worth about $25B. The news of the new subsidy slashing could endanger the purchase. Sallie Mae shares (hope you don't have any) dropped almost 10% on the news of the Congressional action.