One Month Later

On March 25, along with the health care bill, Congress voted to cut commercial banks out of the federal student loan market. Federal money would now go to schools, which would lend directly to students. Kelly Field has a great article in the Chronicle of Higher Education about history of the muchanticipated bill that moved schools to direct lending. According to Field:

The loan companies’ defeat this spring has brought about major changes in student lending, which has been a competition between the public and private sectors since the early 1990s…. With the end of the bank-based program, lenders and guarantors are scrambling to redefine themselves, either as service providers or as private student-loan companies. Many are expected to leave the business altogether, which would prompt a wave of consolidations.

In the weeks since the bill passed, the student-loan industry has begun to redefine itself, shifting its focus from issuing federal loans to providing private loans and borrower services. It is poised to morph from a diffuse network of hundreds of lenders and guarantors to a handful of companies that are increasingly dependent on federal and state contracts.

With this shrinkage in the student loan industry there have been, as feared, some job losses. Sallie Mae laid off 2,500 employees. The National Student Loan Program got rid of about 20 percent of its staff.

One thing that still remains to be seen is what will happen to affiliated industries. As part of their lobbying efforts borrowers warned that borrower services, like “financial-literacy education, debt management, and default prevention” would simply go away if banks weren’t there to provide them. Colleges, after all, don’t really have the resources to create these kinds of departments.

College still haven’t figured out how to do that but, in the words of one student loan guarantor, at least now the financial aid community is “shifting away from a debate between the direct-loan program and the bank-based program and toward how to best help students manage their debt.” Yes, it’s about time.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer