College students will have a financial incentive to consolidate their multiple college loans under the federal government's Direct Loan program if the bill announced Tuesday by U.S. Sen. Sherrod Brown (D., Ohio) is made into law.
Senator Brown said he introduced legislation that would simplify the payback of student loans by moving student borrowers out of the private loans they got before last year when banks were removed from the federal student loan program. Students would have up to 2 percent of the private loan's principal forgiven by taking part in the consolidation.
According to Mr. Brown's office, about two-thirds of Ohio students graduate from four-year colleges with an average of nearly $26,000 in student loan debt.
In 2010, Congress ended federal subsidies to private lenders through the Family Federal Education Loan program, making the U.S. Department of Education the sole servicer of all loans. The move was projected to save taxpayers $68 billion over 11 years.
However, 6 million borrowers are still paying on loans acquired through the FFEL, some paying to two or more loan providers.
"Having multiple payments to multiple servicers can complicate the repayment process and increase the risk that a borrower may miss a payment and accrue financial penalties," Mr. Brown said.
The Temporary Student Loan Debt Conversion Act would give borrowers nine months to convert their FFEL debt to direct loan debt to qualify for the incentive. Mr. Brown said the Congressional Budget Office estimated the legislation would save $1.8 billion over 10 years by eliminating federal subsidies for FFEL lenders.
He told reporters in a telephone news conference that he doesn't expect significant opposition to ending the Family Federal Education Loan program early.
"I think the banks realized they were on the wrong side of this. I don't think they're going to be vigorously opposing this," he said, adding that there's a finite amount of money involved, since the banks aren't making any new loans under the program.
A spokesman for Lourdes College said students there will benefit from the incentive because the college had offered students loans under both programs.
Some transfer students at the University of Toledo might benefit, but most UT students would not because the university has offered only direct loans since 1994, said Carol Baumgartner, director of financial aid. She said the FFEL loans provided no benefit to UT students over the direct loans.
Under the bill, the $1.8 billion in savings would be reinvested into the Pell Grant program, which is facing an $11.2 billion funding gap for 2012. A total of 240,336 Ohio students received Pell grants in the 2008-2009 academic year, for a total of $671.9 million.
Nancy Hoover, director of financial aid at Denison University in Granville, Ohio, and chairman of the National Direct Student Loan Coalition, said the consolidation will make it easier for students to avoid missing payments and to repay their loans.
She said the national college graduating class of 2011 is believed to be the most indebted ever.
"I've had the experience of working with students who were confused, and overwhelmed, and trying to work with multiple servicers when they began repayment of their loans," Ms. Hoover said.
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