To Fix Student Lending, Government Must Go

There’s been a lot of unflattering news lately about the student loan industry: Revelations about schools and lenders in revenue-sharing deals; college financial aid officers holding stock in companies on their schools’ “preferred lender” lists; a U.S. Department of Education official owning shares in a lending company he was supposed to be overseeing; and just yesterday, revelations that some lending companies have had largely unfettered access to a federal database stocked with Social Security numbers, email addresses, loan balances, and other sensitive information belonging to tens-of-millions of student borrowers.

To many people, these revelations are just further evidence of the immoral, rapacious greed of for-profit lenders. As Generation Debt author Anya Kamenetz explained recently on the Huffington Post blog:

When I wrote my first piece about the student debt crisis in the Village Voice in June 2004, the future looked grim. Average student loan burdens doubled in the 1990s to nearly $20,000, and in February 2006, barely a year ago, Congress passed the largest cuts to student aid in history.

I never would have guessed that the tide would turn so quickly and that the loan industry, with its fat profits, billions in government subsidies, private jets and baseball teams, would be on the defensive. But here we are.

Kamenetz and others like her are right to be angry about the cushy arrangements lenders have secured through the Federal Family Education Loan Program (FFELP), which guarantees student loans with federal tax dollars. Her solution to the overall student loan mess, however, would do little to attack the root cause of the scandals and graft:

The Direct Loan Program. Switching [to it from FFELP], as described in the reintroduced STAR Act, would save billions we could then use for much needed grant aid. And a “single payer” Direct Loan program would save on marketing costs and limit the potential for scandals like the current one.

The federal Direct Loan Program – which currently furnishes about a quarter of all federal student loans – cuts out private lenders and sends loans directly from the U.S. Treasury to college kids. Now, that might be cheaper to run – though that is itself hotly debated – but the definition of insanity is doing the same thing over and over and expecting different results, which is just what we’d be doing if we decided to solve the current student loan disaster by giving the federal government even more student lending power. The government, you see, is the root cause of the current problems, not the solution:

  • The subsidies that have enriched lenders were created by federal policymakers, not loan companies.
  • Massive federal aid – which according to the latest inflation-adjusted data from the College Board exploded from $48.3 billion to $94.4 billion over just the last decade – has helped fuel skyrocketing tuition, creating ever-bigger federal and private loan markets.
  • Some of the biggest problems unearthed so far directly involve federal breakdowns, including a federal official owning over $100,000 worth of stock in a company he was supposed to be overseeing, and federal bureaucrats giving some lenders almost free rein to comb over highly sensitive student data. (Which, by the way, also ought to make even the most trusting person very dubious of federal promises to fully protect student privacy if allowed to maintain a proposed “unit record database” containing detailed information on every college student in America.)

Unfortunately, many of the student lending industry’s antagonists aren’t actually all that concerned with maximizing efficiency or saving taxpayers money. What they’re primarily interested in is getting as many cheap dollars to students as they can. In other words, its not outrageous subsidies they’re especially angry about, but that the wrong special interests are getting them.

Michael Dannenberg, Director of the New America Foundation’s Education Policy Program and editor of its Higher Ed Watch blog, recently made this abundantly clear:

The ultimate success of these student loan investigations will be measured by the degree to which they result in cheaper college loans for students and families. Right now, students are paying interest rates for college loans that are simply too high.

Apparently it doesn’t matter that total, inflation-adjusted federal aid doubled over the last decade; that inflation-adjusted aid per full-time-equivalent student rose from $6,700 to $10,113 in that same time, or that the interest rate on subsidized federal loans is fixed at 6.8 percent while the prime rate is currently 8.25 percent. For Dannenberg and others like him, when it comes to federal policy college students never get a fair deal.

In light of the reality that the special interests most heavily involved in the student aid debate want as much money for themselves as they can get, and that the government has almost always been happy to provide it, it’s clear that what would be best for taxpayers would neither be to maintain FFELP nor to switch completely to Direct Lending, but to eliminate federal aid altogether. Then, the people who would be enriched would be taxpayers – well, maybe “unharmed” would be a more accurate description – while both lenders and students would finally have to earn an honest buck.