As part of its budget, the Obama administration has proposed streamlining the student loan process by ending government subsidies to private loan companies. Under the current arrangement, the government actually pays student loan companies to originate and service loans and guarantees loan repayment up to 97 percent, which generates huge profits for the loan industry with very little risk.
As Justin Fox pointed out, “over the past two decades, student lending became a textbook case of a privately run, government-subsidized program that delivered a worse, more-expensive result.” Thus, the Obama administration wants to cut the subsidies and directly make loans, saving $94 billion over the next decade. But on the Senate floor yesterday, Sen. Lamar Alexander (R-TN) explained that he wants the government to keep on turning free money over to loan companies, because it ensures that students have a “choice”:
[Obama] wants another Washington takeover, this time of student loans. Instead of letting 12 million students decide they would prefer to borrow from 4400 institutions on campuses all across America — 4400 campuses, 2000 institutions, they’re saying, no, everybody lines up at the United States Department of Education to get your student loan…It makes no sense to turn the U.S. Department of Education into a national bank for student loans. It should not be done.
Alexander is a perfect example of what Barron Young Smith calls “free-market ideologues, who hold that a government program is somehow less socialistic when business is allowed to take a huge cut.”
As the New York Times wrote, the lender subsidy program is “wasteful and all-too-corruptible.” Private students loans are more expensive and tend to have higher interest rates than direct government loans, but students were being steered towards them by financial aid offices. “[Private loans] are expensive, risky sources of credit, like a credit card or a sub-prime mortgage or a payday loan,” said Lauren Asher of the non-profit Project on Student Debt. “They may be helping you pay some bills but it comes at an extremely high cost, and a cost that you can’t predict.”
In recent years, financial aid has failed to keep up with the rising cost of education, leading to more and more borrowing by students. Defaults on student loans “are at their highest rate since 1998, and likely will go higher,” while America’s educational attainment continues to fall. In light of all this, preserving the subsidies is what actually “makes no sense.”