Editorial: Federal college loan program saves money by eliminating private lenders

The Miami Herald

The overhaul of the federal college-loan program approved last week by the House of Representatives is such a no-brainer that one wonders why it hasn’t been done before.

It cuts out the middle man by eliminating the fees paid by the government to private lenders, saving some $87 billion over the next decade, according to the nonpartisan Congressional Budget Office. That alone makes this legislation worthwhile — but, wait, there’s more.

One provision promises to streamline the loan-application form, a measure that will bring joy to the heart of any parent who has ever tried to help a son or daughter fill out the so-called Free Application for Federal Student Aid form.

The form is so frustrating and difficult to complete that, according to the Department of Education, more than 1.5 million college students who likely were eligible to receive Pell Grants in 2003-2004 didn’t apply for financial aid because they found it too confusing.

Under the House bill, half of the amount in savings realized by the overhaul would go toward new Pell grants, the main federal college scholarships for low-and moderate-income students. The cost of the loans would not change, but the maximum Pell grant scholarship would increase from $5,550 in 2010 to $6,900 by 2019. The current ceiling is $5,350.

All of this makes a difference for the millions of American families with children either in college or on the way. About 5.5 million students use these loans each year, and higher education is not getting cheaper.

According to the Department of Education, the average student today graduates with about $17,878 in federal student loan debt. Each year, as many as 200,000 would-be students decide to delay or forgo higher education because of the cost.

The bad news is that even no-brainers have a difficult time winning approval in Congress. The private loan industry is peeved because the loans were practically risk-free (they were guaranteed by the government) and a secure source of income. They are arguing that students should have a choice, but that overlooks the additional cost to taxpayers of allowing the middle man to take a cut of the business.

There is no reason to continue to spend taxpayer dollars on subsidies to lenders when students can get the same benefit and service through the federal government. Private lenders would be allowed to bid for a limited number of contracts to service the government’s loans, but otherwise they would be out of the picture _ and will not be missed.

Finally, the bill also includes a number of additional provisions that make this legislation a priority. One would transform community colleges by investing $10 billion in the system nationwide, and another would provide $8 billion over eight years to improve early education programs from birth to kindergarten. Both of these would have an impact in South Florida.

The House measure was approved 253-to-171 in a largely party line vote. The Senate should rise above partisanship and set aside misleading, phony arguments about a “government takeover” of the loan program and approve this common-sense reform.

(c) 2009, The Miami Herald. Distributed by McClatchy-Tribune Information Services.