Student Loans: Use Public Funds for College Students, Not for Banks and Private Lenders

By Linda Stamato
A bill introduced in Congress on Wednesday would end the bank-based guaranteed-student-loan program (and provide additional money for Pell Grants, expand the Perkins Loan program from the current $1-billion to $6-billion a year, while overhauling its structure). Introduced by the chairman of the U.S. House of Representatives education committee, George Miller (D-Calif), it mirrors President Obama’s budget proposals by shifting all student loans into the government-run direct-loan program.

Under the bill, banks and other lenders would no longer “originate” federal student loans, but they could compete for the right to service them. And guarantors could compete for grants to provide borrower services like financial-literacy education, default prevention, and borrower retention.

“Many able students are excluded from college for no other reason than their ability to pay” (Center for the Study of Higher Education, Penn State University: 2009)

The House education committee is expected to take up the bill next week.

It’s hard to keep a straight face as private lenders vie to remain in the guaranteed student loan business. With virtually NO private capital available for financing student loans, what banks do is funnel public money to students and keep not a little for their “efforts.” Who thinks it’s a good idea to pay banks to give students public money? The usual suspects: those who benefit directly, their lobbyists, and members of Congress whose “interests” are affected.

Rutgers University Commencement in MayMore than 10,000 Rutgers students depend on the Pell Grant program for tuition aid, and Rutgers ranks among the top 10 public universities in the nation in the number of Pell recipients enrolled

The rhetoric is beyond the pale. Listen to Senator Lamar Alexander (R-Tenn) for example:

“This effort by the Obama administration for a Washington takeover of student loans is just one more example of a long line of Washington takeovers of banks, insurance companies, car companies, health care, that I totally object to.”

What the Obama administration proposed, though, goes like this: Scrap the existing program–so that all federal loans are made directly by the government–in order to save billions of dollars in subsidy payments to lenders, making it possible, then, among other things, to redirect money to pay for expanded grant aid to needy students. According to the Congressional Budget Office, replacing subsidized loans made by private banks with direct government lending would save between $87 and $94 billion over the next decade. (See my earlier blog on the subject: “Finance Federally Guaranteed Student Loans Without a Middleman” for more information).

While making direct loans may seem like a ‘no-brainer,’ it isn’t; too many vested interests are at stake.

Take a look at the lengths to which Citibank is going, for example, to retain the student loan business it has. The bank is spending some portion of its federal bailout funds to lobby against loan reform. And, why not? If the alternative to the Obama plan, to which it subscribes, were to gain approval, Citibank and its colleagues in the private-lending-of-public-money business stand to pocket $15 billion (yes, billion, at the expense of needy students).

The bank emailed borrowers who took out student loans with Citibank encouraging them to write to Congress opposing the administration’s proposal, using such words as “choice” and “service,” but, really, where is the value added in this arrangement of being a middleman between the provider of funds and the receiver of the aid? What choice? What service?

The argument that the Obama plan (and, now, the Wilson bill) will deny students choice is just plain hogwash. The call for “competition” is a joke. The terms on these loans are identical regardless of vendor, so there really is no choice to make.

And, by the way, take note Senator Alexander, under the bill students can still borrow from banks, but their loans would not be guaranteed by the government (let’s hear it for the private sector!) and the interest rate would not be set by the government. (the choice is up to the banks) . More like the competition the private lending crowd should be pleased to see, no? Well, not really. The banks prefer that the public bear the burden and pay the banks for the privilege.

Representative Miller finally got fed up with the game (and introduced his own bill):

“It’s unfortunate that a small number of lenders are using legislative gimmicks to mask the fact that their proposal would divert $15 billion into their own pockets at the expense of students…..This cynical stunt is another reminder that our federal student loan programs need major reforms to ensure they operate in the best interests of students and taxpayers.”

What the banks are seeking is a risk-free business in which they essentially use taxpayer dollars to “originate” loans, with repayment guaranteed, and then resell those loans to the Treasury–this is a system in which they get all the rewards and we, the public, take the risk. What does it take to “originate” a loan? Well, it’s a process the federal government already does, according to the deputy under secretary of education, Robert Shireman, “in a much more efficient way.”

With the government directly or indirectly financing virtually all federal student loans because of the current financial crisis, is there any reason to continue a program that was intended to inject private capital into the education lending system? Hello?

Come on. Let’s cut through all the rhetoric and do what’s right and sensible. Let’s reform the student aid program once and for all and put our dollars where the needs are–with the students. Banks can (and will) take care of themselves.

Reforming the student loan program is a critical element of President Obama’s strategy to make college more affordable, one of three domestic priorities. While there may be legitimate arguments about his other two–heath care and energy–there should be none about this one.

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