In his State of the Union Address recently, President Obama characterized federal subsidies to banks making student loans, as “unwarranted taxpayer subsidies” and again stated his desire to end private bank involvement in the origination of student loans. One of the far reaching goals of the Obama administration is to overhaul the student loan industry by eliminating the middle-men – the private lending institutions.
If Congress passes such legislation, it would transform the financial aid arena and secure federal control of the industry. The government would consolidate federal authority of student lending into the United States Department of Education. Last year, lawmakers in the House of Representatives passed legislation which eliminated federal subsidies to banks that offer student loans. This would effectively terminate future involvement of private institutions. The issue has yet to be formally taken up by the Senate, primarily because even some Democratic senators have serious concerns about the plan.
Obama’s main initiative is to bump up graduation rates in post-secondary schools. He has called on every American to graduate from college, and would like to see the U.S. once again lead the world in the percentage of young people graduating from colleges and universities. He believes that access to college would be increased among students from families with lower incomes by eliminating private lending institutions.
What are the advantages and disadvantages of the proposed change?
Advantages of Federal Control: • Savings from existing government subsidies to banks are intended to be channeled into programs like Pell Grants which supposedly should increase access to college or trade schools among poor students providing the foundation for a better future via a college education or vocational training. • Less emphasis on ability to repay since the federal government is not concerned with losing money since it already guarantees
loan defaults to lenders through the subsidies. Also, a generous forgiveness program currently exists.
Disadvantages of Federal Control: • No competition means the federal government will have a monopoly over student lending which is a bit controversial even for some Democrats. The government could dictate the interest rate or loan terms they deem “reasonable” because there will be no need to worry about losing business. • This would essentially install an entitlement program on par with Medicare or Social Security. These programs currently have very little money to provide what they were intended to accomplish. If politicians have access to yet another source of taxpayer money, there is no guarantee that loans will always be readily available.
• Government bureaucracy is famous for its tendency to be slow and good customer service is rare.
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