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Student Aid Reward Act

Last updated 4th Oct 2022

There's some bipartisan legislation on the horizon that aims to send more Americans to college, and it's called the Student Aid Reward Act. Originally sponsored by Senators Kennedy (D-MA) and Smith (R-OR), and Representatives Petri (R-WI) and Miller (D-CA), the act intends to increase college scholarships with no additional cost to taxpayers.

Benefits of STAR

The Student Aid Reward Act, or STAR, does this by encouraging colleges and universities to choose between the less expensive of the two federal government student loan programs: Federal Family Education Loans (FFEL), and Direct Loans. Schools that switched to the less expensive of the two programs, as determined by the secretary of education, would be given half of the savings generated from the switch. These same schools must then use the savings generated to increase Pell Grants or other needs-based scholarships.

"We waste billions of dollars in corporate welfare every year on student loans, and we cannot afford it any longer. We should use scarce tax dollars to help students, not banks," said Senator Kennedy. Initial estimates indicate the switch could generate $17 billion in additional grants over the next 10 years.

Cost of Direct Loans versus FFEL

According to 2006 budget numbers, the FFEL programs costs taxpayers $12 for every $100 lent to students. In contrast, Direct Loans cost around $1 for the exact same $100 loan. To put those numbers in perspective, consider this: If all the FFEL loans in 2005 were made as Direct Loans, taxpayers would save $9 billion.

If all colleges and universities were to switch to Direct Loans, the Student Aid Reward Act has the potential to generate more than $60 billion in additional student aid over the next 10 years. All of this comes at no additional cost to taxpayers. The Act would also boost Pell Grants for many students by as much as $1,000 per year to a maximum of $5,050.

Direct Loans

With Direct Loans, students are borrowing directly from the federal government. The program is administered by private sector companies through a competitive bidding process. This results in extremely competitive interest rates and low overheads. This structure also makes obtaining Direct Loans a simple process.

FFEL Program

The FFEL program provides loans to students through private banks. That means money is paid back to the lending bank, but repayment is guaranteed by the federal government. In addition, there is a Student Loan Loophole, which provides these same banks with a subsidized rate of interest of 9.5%. This means the federal government bears interest rate risk along with the risk of default. Not a bad deal if you're lending institution participating in this program.

Amendments to the Student Aid Reward Act

The original version of this Bill provided incentives to colleges and universities to switch from the FFEL program to Direct Loans. A subsequent amendment to the Bill recognized that private lending institutions might be willing to offer more attractive rates when challenged with competition. Therefore, the amended Bill asks the secretary of education to make the decision as to what is the best "deal" for those involved.

Overall, the Student Aid Reward Act seems like a winner because students, the federal government, and taxpayers all stand a chance to benefit from the passing of this Bill.

Note: The Health Care and Education Reconciliation Act of 2010 eliminated the FFEL program, and no loans were permitted to be made after June 30, 2010. As was planned in this act, all loans are now made through the federal government's Direct Loan program.

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Moneyzine Editor

Moneyzine Editor