CQ Politics ran John Cranford's column yesterday explaining the logic behind the Student Aid and Fiscal Responsibility Act.
Two weeks ago, the House Education and Labor Committee, with the strong encouragement of the Obama administration, took a step toward ending the false premise that private lenders are full partners in the federally subsidized college loan program. If a bill approved by the committee becomes law, private lenders will be cut out of this program and will have to stop dining at their taxpayer-provided trough.Learn more about the benefits of the Student Aid and Fiscal Responsibility Act and read Mr. Cranford's complete column.
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The lenders have held up the pretense that they provide better service than does an arm of the federal government and that there are actually differences among bank loans, so that students stand to benefit by picking one over the other.
Sorry, but that notion is a sham. Congress has long required that the terms of these loans be identical, regardless of whether they are issued by the government or a private lender. It doesn’t matter to the student where the money comes from — the dollar amounts, the interest rates and even the repayment terms are virtually the same.
For taxpayers, though, there is a difference, and it’s a big one. In the case of presumed “private” loans, the government pays more than it does for “direct” loans — billions of dollars more — because it guarantees the principal amount and it promises a minimal return to the lender. Banks are supposed to be compensated for taking risks, but in the case of government-subsidized student loans, they incur almost no risk. Yet they get compensated anyway.
Moreover, there’s ample evidence that some private lenders have engaged in questionable or worse behavior to persuade colleges to funnel student borrowers their way. When money is free, people will do all sorts of things to get their hands on it. And that raises questions about why lawmakers would want to perpetuate a system that promotes graft, as well as waste.
