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A Times Editorial

End free ride on student lending

President Barack Obama is trying to end the free ride that banks have enjoyed in the student lending business, where they are paid substantial subsidies for writing virtually risk-free loans. The administration is proposing sweeping reforms to the student financial aid system, including that the federal government make all its loans to students directly. The change would end a system of expensive corporate welfare and expand college financial aid, allowing more students to attend college. And the only reason Congress wouldn't adopt it is because of the unhealthy sway of the powerful lending lobby, which is desperately fighting to keep its hands on student-lending's unearned profits.

The administration's proposal would end the Federal Family Education Loan Program under which banks and other companies such as Sallie Mae make loans to students at rates set by Congress — with a government guarantee of repayment of up to 97 percent. In its place, the administration wants to expand a current program under the Education Department that makes loans directly to students through their colleges in the same way Pell grants are awarded. This change would save $94 billion over 10 years, money that the administration wants to use to increase Pell grants for the neediest college students.

The arguments against the change being made by the lending industry are little more than whining about lost profits. Lenders claim that large job losses would result. But the servicing of the loans would still be done by private businesses, so it isn't likely that there would be a serious net job loss. Moreover, the jobs couldn't be moved overseas since the loans would be considered federal dollars which can't be handled by foreign nationals.

Recently, certain lenders in the student loan industry have been under scrutiny for inducing college loan officers with gifts, trips and payments to direct students to their loans. By moving to a government-run program, any lingering problems in this area would disappear.

The stumbling block now is Congress, where Republican lawmakers have mounted an offensive joined by some Democrats from districts with big student lenders. This is too important to allow politics-as-usual to rule the day. The president's plan is wholly in the public interest, and any legislator who votes against it has other interests at heart.

End free ride on student lending 04/26/09 [Last modified: Sunday, April 26, 2009 9:20pm]
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