Government should handle all student lending

San Jose Mercury News

Given a choice, would you use taxpayer money to subsidize banks, or to help students pay for college?

It’s rare for a public policy question to be this big a no-brainer. But that’s the right way to describe the Obama administration’s proposal to save an estimated $80 billion over 10 years by making all student loans directly through the government rather than private lenders, and direct that money toward education programs.

The House has passed legislation to eliminate the middleman — companies such as Sallie Mae — from the process, but the proposal is stalled in the Senate amid filibuster threats.

U.S. Education Secretary Arne Duncan wants to use the money for programs that help students get to college and succeed there, crucial steps for the country if U.S. companies are to compete globally long-term. The biggest of these programs is a $40 billion increase in Pell Grants, which would improve affordability for students now and reduce indebtedness later.

The plan also includes $8 billion for early childhood education, an essential ingredient for success later in life, and more money for community colleges, low-interest Perkins loans and college-tuition tax credits.

In concept, the proposal isn’t that dramatic; the government already makes the majority of student loans. However, a very profitable slice currently goes through private companies that lend out federal money and collect fees and interest, even though taxpayers bear the risk of default. This piece of the market would be eliminated.

Lenders, supported by some lawmakers from both parties, are arguing against the plan, trying to protect what Duncan calls their “free ride.” Perhaps sensing that public opinion isn’t on their side, they’ve suggested an alternative that would limit their profits but also save the government far less.

One of the primary arguments against the bill is that it represents a government takeover. But this argument is purely political, not substantive, as the government provides virtually all the capital for student loans already.

The industry also says the bill will cost jobs. Sallie Mae estimates it would be forced to lay off some 2,500 people, though it doesn’t account for positions that would be regained because the plan calls for private companies to service the loans. Regardless, saving these jobs isn’t worth $80 billion.

The lenders argue they can serve students better, and they’re at least partly right, which is why the government would still contract with them to service the loans.

But during the economic collapse, many private lenders stopped offering loans altogether, forcing colleges to turn to the more reliable direct lending programs instead — hardly a shining example of excellent customer support.

It’s one thing to lose your car loan when credit markets freeze up. It’s quite another to be unable to attend college. Student lending is too important to be left to market vagaries.

This plan eliminates corporate welfare and funds key education programs without adding to the deficit. The Senate should pass it without delay so that colleges will have time to implement it in time for the next school year.

The above editorial appeared was originally published Feb. 23 by the San Jose Mercury News. Content was made available by MCTCampus.