Des Moines Register
06-05-06
Overhaul lending for college students
Save money by cutting out middleman.
REGISTER EDITORIAL BOARD
Consolidate now. That's the short fix and the best advice for graduates who owe
money on student loans. They need to lock in the lowest possible rates before
July 1, when rates for the popular Stafford loan will jump to 6.54 percent.
The more complicated fix: The nation should re-examine its system for how
students borrow money for college. The system wastes money, and the Office of
Management and Budget has the numbers to prove it.
Student loans made through private lenders cost the federal government 10
times more than direct loans provided by the Education Department, an OMB
report released last year found. Some students borrow directly from the
government. More and more, however, they borrow guaranteed student loans
through private lenders such as Sallie Mae. For every $100 spent on student
loans, the government spent only 84 cents for direct loans, compared to about
$12 for government-guaranteed loans from private lenders, the study found.
Clearly, going through a middleman costs taxpayers a lot more.
Best course of action: Expand direct government lending to students.
The government is already in the business of direct lending. And the government
already assumes the risk of loan default for everyone with a student loan whether that loan came directly from the feds or from a private lender.
When Congress created the loan program, lawmakers were afraid lenders
wouldn't want to grant unsecured loans to young people. So they guaranteed
repayment to lenders if students default. What a deal - for lenders. Collect
interest, fees and penalties from borrowers. If the borrowers default on their
loans, the government will pick up the cost. Little risk, big profit.
It's such a great deal, the last thing lenders want to see is more people borrowing
directly from the government through direct-loan programs. So lenders did
exactly what one would expect in responding to the OMB study: disputed the
findings. Lenders argue that direct loans actually cost taxpayers more than
private loans and that the OMB didn't figure in certain costs associated with
student-loan programs, including administrative expenses.
The government does incur administrative costs by directly lending to students.
But common sense dictates that directly loaning money to students costs less
than funding a middleman. Especially when the middleman takes a chunk of the
money earned on interest, is beholden to make a profit for its stockholders and is
paying high CEO salaries.
According to the OMB, taxpayers could save billions if the government cut out
the middleman private lender and expanded direct lending to students. That's
money that could be used to make education more affordable.