Today Secretary Arne Duncan published an editorial in the Wall Street Journal stating that banks don't belong in the student loan business. He starts by considering if every program within the Department of Education helps students learn and if it is a good use of taxpayer dollars. He says that in the case of the Federal Family Education Loan Program (FFEL), the answer is no.
He says:
We encourage you to learn more about the Student Aid and Fiscal Responsibility Act and to read Secretary Duncan's editorial.
He says:
Under the current FFEL program, banks make loans to students. While those students remain in school, the federal government pays the interest on their loans; otherwise the interest accrues. Once the borrowers leave school or graduate, the lending agency collects on the loans. But if the student defaults, my department pays back the loan—plus the interest owed. The FFEL program, in short, is a great deal for bankers but a terrible one for taxpayers.Secretary Duncan goes on to explain how the Department of Education would originate the loans, but private banks would service them. That is how roughly 80% of student loans are done today. He notes that those colleges who have already moved to the Direct Loan program report that it was quick and easy. With the $87 billion in savings, the reform would substantially increase scholarships in the Pell Grant program and other financial aid for low-income students. Additionally the reforms would start new programs to raise college graduation rates and strengthen our community colleges.
We encourage you to learn more about the Student Aid and Fiscal Responsibility Act and to read Secretary Duncan's editorial.
Banks may not belong, but guarantors do. They have the expertise to help borrowers stay on track with their payments, and to strengthen financial capacity for millions of students obligated to go into debt in order to go to college. If going into debt in order to access higher education is acknowledged as public policy, helping graduates manage and pay off their debt should be part of public policy too. And the "due diligence" activity of servicers is woefully inadequate. Repurposed guarantors will fill a great need that otherwise will not be addressed in a unified regime of student loan capital. Specific provision for them must be included in the conference version of SAFRA after the Senate votes, beyond the vague references of the Etheridge amendment.
I think it’s a good action to cut off the bank as the middle man for student loans and helping low-income students to get a better education experience.