Political History of The Program
Congress passed a pilot version of the Direct Loan program as part of the Reauthorization of the Higher Education Act under President George H. W. Bush,Bush Signed it into law on July 23, 1992. Under President William J. Clinton the Omnibus Reconciliation Act of 1993 set up a phase in of direct lending. Many schools volunteered for the program, but the 104th congress passed legislation to prevent the switch to 100% direct lending in 1994. Funding for the Federal Direct Student Loan Program decreased from just over $7 billion in 2006 to $509 million budgeted for 2008.
Democrats have made more student-favorable Direct Loan terms part of their platform. Under Obama's new budget, all new loan originations will be under the Direct Loan program by July 2010, netting $6B in annual savings. The bill approving the measure passed the House of Representatives on September 17, 2009. The switch to 100% Direct Lending effective July 1, 2010 was enacted by the Health Care and Education Reconciliation Act of 2010.
In comparison, other countries have also experimented with government-sponsored loan programs. New Zealand, for instance, now offers 0% interest loans to students who live in New Zealand for 183 or more consecutive days (retroactive for all former students who had government loans), who can repay their loans based on their income after they graduate. This program was a Labour Party promise in the 2005 general election.
The direct loan program has been criticized for not adjusting the interest rate according to risk. According to a critic, the failure to adjust interest rates according to risk contributes to an inefficient allocation of resources in higher education, and structural unemployment.
Read more about this topic: Federal Direct Student Loan Program
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