The federal college lending system is desperately in need of an overhaul. Congress took a first step when it made it a crime for lenders to solicit business by offering college officials kickbacks and other advantages — an all-too-common practice. President Obama’s new budget gets to the heart of the matter.
The budget rightly calls for phasing out the wasteful and all-too-corruptible portion of the student program that relies on private lenders. And it calls for expanding the less-expensive and more-efficient program that allows students to borrow directly from the federal government. That means doing away with the Federal Family Education Loan Program, under which private lenders receive unnecessary subsidies to make risk-free student loans that are guaranteed by taxpayers.
Right now, nearly two-thirds of the country’s college lending is carried out through the family education loan program. It was created at a time when the college loan business wasn’t big enough to attract enough lenders. The subsidies long ago became unnecessary. But lenders, who reaped enormous profits, and free-market enthusiasts have zealously defended the program.
The government has had to keep the loan program going through the credit crisis by buying up outstanding loans. The direct loan program, by contrast, has continued to function smoothly.
Colleges will be given software that will enable them to make the switch. And once the transition is complete, the savings can be pumped into federal Pell Grants, which are aimed at making college possible for poor and working-class students.
The goal of the student lending program is to make college more attainable. By embracing these changes — and eliminating an unnecessary federal subsidy — Congress can promote that goal and save taxpayers nearly $50 billion over the next decade. (New York Times – Editorial)