Obama Financial Aid Plan Would Help Students, Not Banks

Say you’ve got a few billion dollars burning a hole in your pocket and you can give it either to bankers or needy college students.

Whom do you choose? This is not a trick question.

Confronted with that choice, Washington has for years given money to banks in subsidies and guarantees to encourage them to provide college student loans.

But now, President Barack Obama wants to cut out the middlemen and loan the money directly to students.

Congress should make that happen.

With the cost of a college education soaring and the economy sinking, students and their families could sure use the money. And it wouldn’t cost taxpayers an additional dime.

The reform wouldn’t just enlarge the pool of money available for loans. It would also simplify the financial aid process.

Students would no longer need to apply separately for a bank loan, after applying to the colleges of their choice for financial aid. As a result, families would know much earlier in the tense process how much aid they could expect, allowing them to make more informed decisions about which school to attend.

There are currently two main types of federal student loans. One is the direct loan, where tax dollars are lent directly to students. The other is the Federal Family Education Loan, in which private banks do the lending. The latter loans account for more than two-thirds of current college borrowing.

The private lenders get a government subsidy for each loan they make, and as the loans are repaid, the lenders pocket the interest.

Because the loans are guaranteed by the government, taxpayers are on the hook to repay the lender 97 percent of what’s owed if the borrower defaults. That’s a good deal for lenders — too good.

Continuing business as usual would cost taxpayers $94 billion over the next 10 years. That’s money that would never reach students, but flow instead into the coffers of banks that risk nothing by making the loans. Obama has a better idea.

He wants to eliminate Federal Family Education Loans and do all federal college lending through direct loans. And he wants Washington to use the money that it would save to increase the amount available to needy students in Pell Grants by $500.

That would push the maximum Pell Grant — which students don’t have to repay — up to $5,550 a year.

So, let’s recap: Washington could cut out the costly middleman on loans, simplify and speed up the financial aid process, and increase Pell Grants — all at no additional cost to taxpayers.

Who could possibly be opposed to that?

Private lenders, for one.

College loans provide a risk-free revenue stream they won’t be eager to see dry up. There may once have been some justification for subsidizing and guaranteeing student loans, other than the belief that the private sector can do everything better than government. But not now.

Still, banking interests are powerful in Washington. They often get what they want because of the second group that may oppose this reform.

That group is the members of Congress who represent districts where banks doing this business — and the jobs they provide — are located. It may be cynical to suggest that campaign contributions could play a role here.

But maybe not too cynical.

Then there are the congressional appropriators. Obama’s plan would strip Congress of its power to set the maximum value of Pell Grants each year. It would instead tie increases to inflation. Powerful Washington players usually don’t cede turf willingly.

Reforming financial aid won’t eliminate all the obstacles to a college education that families face.

But squeezing out inefficiencies and unnecessary costs — and making sure that every tax dollar provided for financial aid actually goes to students — isn’t too much to ask of elected officials. (Colorado Daily)

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