Deficit Reduction Hits Home

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

Late 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% of the projected $1.6 trillion in deficits over that same period.

The DRA calls for cuts to many areas, ranging from welfare to crop subsidies. There are two moves in particular that could affect many Americans, and these changes demonstrate both the good and the bad of the bill.

Student Loan Consolidations

Federal spending on student loans represents about one-half of 1% of the federal budget, but proposed cuts to the student loan program equal 30% -- 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 -- a provision that currently enables students to lock in current low fixed rates. And even more deeply buried in the bill 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 for this bill.