Everyone Wins With SAFRA

The Student Aid and Fiscal Responsibility Act (SAFRA) will provide substantial relief to college students and reduce our national deficit, all while instilling motivation for future students to attend college and ultimately be debt free.

Attached to the healthcare makeover is a bill that will have a significant impact on the lives of millions of college students: the Student Aid and Fiscal Responsibility Act or SAFRA.  SAFRA eliminates private-loan agencies, placing full responsibility for providing higher education financial assistance in the hands of the federal government.  Much of the Republican opposition to SAFRA may simply be because it had heavy Democratic support — reflective of this era’s political calculus.  Many conservatives have also characterized the bill’s expanded role for government in the provision of higher education financial assistance as a “government takeover”.  Though generally sympathetic to resisting government growth, I believe the change embodied by SAFRA is a good one, because it will more effectively assist less-well-off students by giving them access to “cheaper” loans, while financially supporting students who already have “expensive” loans.

To a certain extent, SAFRA simply is an adaptation to a current market reality.  Many higher educational institutions have already switched, or are planning to switch, to direct lending: Texas A&M University announced two weeks ago that it was switching to direct lending. The fact that higher education institutions across the country are voluntarily traveling the SAFRA path indicates that financial aid offices and students alike understand the weaknesses in the current system. While a direct lending program will not tackle the larger issue of rapidly rising higher education costs, it will bring relief to a burgeoning student loan crisis and thereby improve accessibility for poor students to a university education.

Volatile financial markets have increased the cost of a university education by pushing up interest rates for student loans.  Currently, students secure loans from private loan agencies under interest rates calculated by the financial status of the student and the forecasted time it will take them to pay the loan off.  But these loans, once secured, are sold from company to company in a secondary market similar to the home mortgage secondary market.  SAFRA eliminates this secondary market and the volatility it creates in loan costs for students. The federal direct lending program means that student loans come straight from the federal government, which already subsidizes the existing private loan system. As a result, administrative costs will be reduced and the secondary market financial impact will be eliminated because loans will remain in the same hands in perpetuity.  Further, students will be offered five different repayment options designed to ensure that they only take on debt that they can finance, hopefully ensuring that fewer students will default. The result should be a higher return on the overall federal investment in higher education.

There are several incentives in SAFRA for students to pay back their loans more quickly. For example, under the Act’s “Standard Payment” option, students will have a minimum monthly payment of $50, with10 years to pay off the loan, but can secure lower interest rates if they pay off the loan more quickly.  SAFRA also expands and eases the eligibility of Pell grants for family members of soldiers killed in Iraq or Afghanistan after September 11, 2001. Pell grant ceilings will also be increased to $5,500 in 2010, and up to $6900 by 2019.

SAFRA will not only open the doors to higher education to more students and bring relief to current students burdened by high-interest loans, but it will also help reduce the federal deficit.  The new program will produce an estimated saving in federal loan spending of $13.3 billion from 2009-2014.  It also will invest $3 billion into a program that focuses on giving students a greater sense of fiscal literacy—a crucial area of expertise for tomorrow’s workforce.  To combat potential job losses suffered under SAFRA, the bill gives $50 million to loan companies and $50 million to colleges making the transition to direct lending.

I believe that SAFRA’s direct lending solution will provide substantial relief to college students across the nation and a reduction to our national deficit, all while instilling motivation for future students to attend college and ultimately to be debt free.