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Congress gets an F for student loan move

Updated: May 3, 2013 12:14PM

Every year, Congress passes a budget for the federal government. And every year the government doesn't stick to it, so the deficit keeps rising and increasing the national debt.

On Wednesday, Congress narrowly passed the Deficit Reduction Act, or DRA, which is intended to reduce the still-growing budget deficit by about $40 billion over the next five years -- about 2.5 percent of the projected $1.6 trillion in deficits over that same period.

The DRA calls for reductions in spending or reductions in the rate of growth of spending in many areas, ranging from welfare to crop subsidies. In particular, there are two moves that demonstrate both the good and the bad of the bill.

The first area is student loan consolidations. Federal spending on student loans represents about one-half of 1 percent of the federal budget, but proposed cuts to the student loan program equal 30 percent -- roughly $12.7 billion -- of the proposed budget cuts.

Buried in the DRA is a section of the law that will make it illegal to consolidate student loans while students are still in school, an option that currently enables students to lock in current low fixed rates.

More deeply buried

Even more deeply buried in the act is a provision that prevents borrowers from using a clever strategy that currently gives those who have already consolidated their loans a chance to reconsolidate.

It's unfortunate that these provisions passed. If you can refinance your mortgage to take advantage of lower rates, why not your student loan?

Some would argue that mortgages aren't being subsidized by the government, so refinancing is appropriate. But the existing student loan refinancing program really doesn't cost the government any money. Most refinancing is done by private banks. They simply agree to pay off the initial student loan, and accept a lower rate of interest.

If refinancing to a lower rate doesn't cost the government any money, why object?

One of the largest holders of student loans is Sallie Mae, a formerly federally chartered organization that is now privatized. Allowing easier consolidations and reconsolidations by competing organizations could cut into Sallie Mae's profits, so it lobbied strongly and effectively for the proposal.

It's important to know that in addition to the changes created by DRA, there are several rate increases scheduled for existing student loans starting July 1.

The rate for new Stafford Loans for students will jump from 4.7 percent to 6.8 percent, and the rate on new PLUS loans made to parents will jump from 6.1 percent to 8.5 percent.

The DRA also makes changes to Medicaid as it applies to long-term care, making it more difficult to qualify for federally paid nursing home care.

The new act is intended to strengthen the Medicaid program in the long run by making it more difficult for middle-income families to shift assets to their children so the parents can qualify for federally paid nursing home care.

The DRA provides a five-year look back on such transfers, and closes abusive loopholes such as certain annuities or "life estates" techniques designed to get countable assets out of the individual's control. This change makes sense; if federal financial aid for long-term nursing care were limited to those truly in need, the program wouldn't be swamped as it is today by baby boomers trying to qualify for this benefit.

The new law also includes provisions that make the purchase of long-term-care insurance more attractive, including state partnerships that allow people who have purchased, say, $100,000 in LTC insurance benefits to exclude that amount from their Medicaid spend-down if they ultimately run out of insurance benefits and need state care.

Many senior advocate groups, including the AARP, believe this is an attack on seniors instead of a way to preserve Medicaid for needy baby boomers.

Boomer warfare

If boomers don't face up to the need to plan in advance for care, and instead depend on taxpayer funding, we'll transfer a huge tax burden to our children, and create generational warfare.

Overall, it's a shame Congress tampered with student loan refinancing provisions. But I'm glad Congress is encouraging responsible long-term-care planning. And we can only hope that the deficit will actually be reduced, or at least grow at a slower rate. That's The Savage Truth.

Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.

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