Single-Lender for Student Loans: A Good Thing

Government in many instances can do it better. Student loan reform [1] –that awaits passage through reconciliation –will end tens of billions in wasteful bank subsidies and give much of the savings to students (via Pell Grants). How? By the federal government cutting out the middleman –ending the Federal Family Education Loan program (FFELP) that pays private lenders to dole out loans, when the government can do it for cheaper through direct lending. In other words, a single-lender system for student loans.

But bankers and their allies in Congress do not like this idea one bit. The student loan lobby is making its final push [2] to kill student loan reform, proposing a last-ditch alternative plan to keep their profits.

So-called fiscal conservatives such as House Republican leader, John Boehner, decry the possibility of yet another “government takeover,” [3] while drumming up false rhetoric that student loan reform means “saddling our children and grandchildren with billions of dollars in added debt.” The reality conservatives choose to ignore: government does it better, with an estimated cost savings with student loan reform projected at $67 billion [4] over the next decade. The savings was estimated to be nearly $90 billion last fall too, but with so many colleges beginning the switch [5] to direct lending early, the government has begun to realize savings now.

And to be fair, a few in the banking industry see reform as sensible. BOK Financial Corporation’s chairman, George Kaiser, wrote in Politico [6] earlier this week, “I have long felt there is something morally wrong with the subsidy provided to banks and other lenders through FFELP…Fiscal responsibility should oblige the federal government to secure services at the lowest cost, consistent with service quality."

However, not all Democrats see reform as a good thing. Senators Ben Nelson (D-Neb.), Bill Nelson (D-Fla.), Blanche Lincoln (D-Ark.), Tom Carper (D-Del.), Mark Warner (D-Va.), and Jim Webb (D-Va.) all worry about job losses [7] that come with direct lending, even though reform still preserves a role for lenders to service loans. See my rebuttal to them here [8].

We are getting very close to achieving student loan reform, but help ensure that your representative gets the message, LOUD AND CLEAR. Who do they stand with, students? Or banks? Hold them accountable by clicking on this. [9]