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April 16th, 2009

Should Washington Supply Student Loans?



There’s an ongoing battle on Capitol Hill over the future of student loans. President Obama is pushing to replace private lenders with direct government loans. The Congressional Budget Office (CBO) estimates that direct lending could save $94 billion over the next 10 years.

It’s easy to understand how critics may feel that this is just another measure by the new president to expand governmental control. The plan, which could eliminate a majority of the private industry, would undoubtedly change the landscape of how student loans are distributed. Private lenders feel the government is seeking to capture their profits:

“The Obama plan would mean that many lenders would lose 100 percent of their business,” said Mark Kantrowitz, an industry analyst and publisher of FinAid.org. “It would be a dramatic shift for the way this industry works.”

Yet supporters of direct lending feel vast change is exactly what the student-loan industry needs:

Critics of the subsidized loan system, called the Federal Family Education Loan Program, say private lenders have collected hefty fees for decades on loans that are risk-free because the government guarantees repayment up to 97 percent. With the government directly or indirectly financing virtually all federal student loans because of the financial crisis, the critics say there is no reason to continue a program that was intended to inject private capital into the education lending system.

Sallie Mae, the Federal entity that is in charge of student loans, has proposed a compromise:

The Sallie Mae proposal would involve private loan companies originating the loans and then immediately turning them over to the Education Department for a fee. The federal government, which borrows money at a much lower rate than it charges students, would then still generate revenue, which it could channel to needy students.

Think of the criticisms that the nation’s largest banks have endured lately due to their apparent lack of lending despite receiving billions in TARP funds. Students are just looking for the best system which will save them the most money. Many have argued that private lenders haven’t been doing all they can for consumers these days — especially in the credit card and student loan department.

Will students benefit from a Federally-controlled student-loan program? Or is this a Liberal attempt to expand Washington’s control?

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One Response to “Should Washington Supply Student Loans?”

  1. Essential Federal Student Loan Information | Personal Loan Lenders, Resources, Information Says: April 17th, 2009 at 1:20 am

    [...] HSH Financial News Blog » Blog Archive » Should Washington Supply … [...]

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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