Student Loans Be a Cash Cow for Private Lenders?

Twenty years ago, I was able to go to college thanks to student loans, Pell Grants, and parents who worked really hard to help me become the first person in our family to go to college. One of my favorite memories of Washington is the time I got to thank former Senator Clairborne Pell for championing an idea that helped the kids of working class families afford college, too (Pell, by the way, was one of the most decent men to ever serve in Congress).

So, I’ve always viewed with skepticism any plans to alter a college loan system that has helped millions of Americans afford college since the system was instituted in the mid-1960s. I even questioned the Clinton Administration’s plan to institute a direct-lending program in the 1990s, to bypass banks as middlemen and go directly to students through universities. Now, of course, Democrats are preparing to finish the job Clinton started and bypass banks altogether. President Obama first proposed the idea as a candidate more than two years ago, and, as Ed points out, Congressman George Miller is introducing legislation to make direct-lending king.

Ed’s idea that this represents a government takeover of student loans overlooks the minor point that taxpayers already subsidize student loan interest rates and guarantee the loans, whether through direct lending or private firms. It’s like the people who complain, “Get the government out of my Medicare.” The reason it is a risk-free cash cow for private lenders is because the government pays 97 percent of the principal and interest should a student default — and lenders are still able to keep up to half of whatever they are able to get from students AFTER being repaid by the government. Oh, and private lenders also charge higher interest rates than the government.

Predictably, the student loan industry has lobbyists out in force. Sallie Mae, the former government entity now operating as a private player, even hired former Clinton Deputy Attorney General Jamie Gorelick to lobby on its behalf. Their argument: this is a 45 year old program that serves more than 5,000 schools and six million borrowers each year. Why mess with a good thing?”

Actually, it turns out that the student loan system is less of a good thing than you might think. As Business Week recently pointed out, “the industry’s arguments may not carry much sway. Lenders insist they provide valuable services, including running financial literacy programs that help students budget payments. But the default rate for federal students loans made by private lenders is 7.3 percent, compared to 5.3 percent for direct federal loans.”

For that disparity, as President Obama has pointed out, taxpayers pony up $15 million per day that goes directly to banks as profit for running the program, rather than to students as loans. Little wonder the Congressional Budget Office has found that moving to a system of direct lending — like the kind proposed by Miller — would free up to $100 billion over the next 10 years that could help send millions more to college.

And then, of course, there’s the corruption. Numerous investigations — most notably those conducted by Andrew Cuomo as Attorney General of New York — have found that many private lenders give personal gifts and philanthropic donations to colleges and universities as a means to convince college financial aid officials to steer needy students their way. Frankly, many universities seem to be sick of the practice — in the past year alone, the numbers of colleges that have chosen to bypass the middlemen altogether have gone from 1,075 to 1,624, according to Business Week, including such notable working-class heavy universities as Penn State, Michigan State, and Northeastern.

In the end, the question really becomes: should taxpayers be subsidizing the profits of private lenders, or should taxpayers help more students go to college at lower interest rates?

At a time when half of the fastest-growing jobs in America require a bachelor’s degree; when those without a college degree are twice as likely to be unemployed; and when tuitions have risen ten times faster than paychecks, it’s hard not to agree with the view expressed last April by the not-so-liberal Chattanooga Times: ”If your philosophy is that government can do everything better than the private sector, eventually you’ll luck out and hit one area where that otherwise nutty philosophy happens to be true. President Obama’s plan to end private student lending and channel all loans through the direct federal program is the right way to proceed.”Bad Credit? No Credit? No Problem! Guaranteed Approval Loans Are Available!