The other week I got in a little blog spat about the federally subsidized student-loan industry, and now there's more evidence on my side. Currently, the government spends a lot of money unnecessarily guaranteeing student loans through private lenders; ending that program and lending directly to students would save between $4 billion and $6.5 billion a year that could be plowed back into Pell Grants to expand college access even further. In response, lenders -- and the politicians whom they donate to -- accuse the government of trying to "capture" private-sector profits without ever explaining why it's the government's job to provide those profits in the first place.
Making the change would be sound public policy. Now, Barron Youngsmith adds even more strength to the case for federal direct lending with reporting on a facet of the private program I wasn't familiar with:
[T]he private program is insolvent. In May 2008, with America's financial system faltering, private lenders realized they could no longer borrow money at rates that allowed them to make college loans profitable. At that point, Clinton's direct-lending program could have taken over the subsidized system, but lenders raised unsubstantiated fears about the government's ability to oversee so many new loans. They pressed Congress for emergency stopgap legislation to prop up private student lending for the 2008-2009 school year. The bill, Ensuring Continued Access to Student Loans Act (ECASLA), has since been extended until September 2010. In order to keep money flowing to students, ECASLA allows lenders to borrow at a low government rate, ensuring them profitable loans. In addition, it lets banks sell their loans to the government--making their lending programs even more dependent on federal capital and thus even more unnecessary. When ECASLA expires, all Obama has to do is decline to renew it, and private banks' role in student lending will end.
Barron also explains why Sallie Mae's proffered compromise is a bad idea. Between this new development and the fact that student lending now comes under budget reconciliation rules -- it's really an ideal use of the reconciliation process, actually -- momentum is definitely behind this change to benefit students and stop crony capitalism.
-- Tim Fernholz
