SAFRA, or H.R. 3221

SAFRA, or H.R. 3221- A Huge Change for the Student Loan Industry

In September, 2009, the House of Representatives passed a bill called H.R. 3221, also known as SAFRA (Student Aid and Fiscal Responsibility Act). The bill has not yet been voted upon in the U.S. Senate. The bill requires that for student loans all federal money be loaned directly to students and not go through student loan companies like Sallie Mae, the largest of all the student loan companies. The bill would have an enormous effect on the student loan

industry. I recently saw a newspaper article from Pennsylvania that stated Sallie Mae would probably terminate 700 local jobs if it passed. And the largest student lender in Wyoming, the Wyoming Student Loan Corp., has already announced that it will stop making new student loans.

President Obama backs SAFRA, and the Congressional Budget Office (CBO), the primary agency charged with interpreting the cost effects of legislation, says that $87 billion will be eventually saved by funneling the loan money directly to students instead of letting pass through the hands of the student loan industry.

H.R. 3221, the SAFRA bill, will give a huge boost to the Direct Student loan program that was begun in 1992. This program had about 34% market share at its peak in the mid-1990’s. Sallie Mae and other student lenders put on massive lobbying campaigns for years because this program was costing them money, and they managed to cut the influence of the Direct Loan program significantly. By 2006 it only accounted for about 19% of the student loan market.

A savings of $87 billion to taxpayers from H.R. 3221 is a lot of money, even in this administration that tosses hundreds of billions around as if they actually had this money (they don’t- they just keep printing it and increasing the budget deficit to unbelievable limits). It will be interesting to see if the Senate passes this bill or if the substantial lobbying machine of the student loan industry can derail it.

There are millions of people in the U.S. with overwhelming student debt that they cannot deal with. It is not unusual for a person who originally borrowed $30,000, for example, to now find themselves owing $100,000 or more. This is because of huge penalties and collection fees. The latter can be 25% or more. And with collection fees come the harassments of collection agencies who know they have the borrower over a barrel and have absolutely no reason to negotiate. On top of that the borrowers can never get out from under these loans without paying the huge fees demanded by the student loan companies since neither private nor government backed student loans can be discharged in bankruptcy like other debt, such as credit card debt, for example. This is bound to become a bigger political issue in the future with so many people affected who find their lives in disarray because of student loan debt. It is a fact that in the aggregate student loan companies make more money from loans that default than they do from loans that are paid normally and on time. With motivation like that it is no wonder so many borrowers are in deep trouble.

Student loan companies are motivated by profit. If SAFRA passes they will have less opportunity to pursue the predatory practices, including enormous penalties and collection fees that have produced that profit. Hopefully the Senate will not be taken in by the lobbing machine of the student loan industry and will pass the SAFRA bill. Stay tuned.