The Battle Over Student Lending

Private companies that reap undeserved profits from the federal student-loan program are gearing up to kill a White House plan that would get them off the dole and redirect the savings to federal scholarships for the needy. Instead of knuckling under to the powerful lending lobby, as it has so often done in the past, Congress needs to finally put the taxpayers’ interests first.

That means embracing President Obama’s plan. The proposal takes the long-overdue step of phasing out the portion of the student-loan program that relies on private lenders. At the same time, it expands the more efficient and less expensive portion of the program that allows students to borrow directly from the federal government through their colleges.

About three-quarters of this country’s college lending is carried out through the private program, known as the Federal Family Education Loan Program. Under this galling arrangement, lenders are paid handsome subsidies to make student loans that are virtually risk-free, since they are guaranteed by the government.

The subsidy was created at a time when lenders weren’t interested in the student business and was intended to keep loan money flowing through tough economic times. But that did not happen during the credit crunch, when the federal government had to inject liquidity into the system by buying outstanding loans.

The direct-loan program suffered no such disruption. In addition to being more reliable, direct lending is also less expensive. Equally important, according to the Congressional Budget Office, the country would save $94 billion over the next decade by switching completely to direct lending.

This would not in fact “grow government,” as conservatives in Congress have already begun to charge. The loans would be handled through colleges, just the way Pell Grants are now. The loans would then be serviced and collected by private companies that are already competing for this lucrative business.

Forcing service companies to compete permits the government to get the best possible deal for the taxpayers. The service contracts would be periodically re-evaluated, based on how well the companies treated their customers and how successful they were at preventing borrowers from defaulting.

The new program would, of course, trim the bottom lines of some corporations, but it would not create enormous job losses, as some critics are suggesting. The work force needed to service, say, $100 billion in student loans must surely be comparable in size to the work force needed to lend the same amount. Beyond that, government rules forbidding foreign nationals from handling federal assets would ensure that the servicing jobs were not shipped abroad.

The direct-lending proposal is clearly in the country’s best interest. But it will have a tough time in a Congress that has been historically more interested in pleasing the lending lobby than in looking out for families struggling to educate their children. (New York Times)

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