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Outside editorial: College loans, no middleman

Posted: Tuesday, April 06, 2010

The following editorial first appeared in the Los Angeles Times:

The primary obstacle for young adults seeking to complete a college degree isn't that their public schools failed to prepare them or that their colleges somehow alienated them to the point of dropping out. It's money. Even solidly middle-class families can seldom cough up the more than $160,000 that private college will cost over four years. Working-class families must struggle to send their children to public colleges, which cost anywhere from several thousand dollars a year for live-at-home commuters to $25,000 a year for students at the University of California.

The federal government has spent extraordinary sums each year for student loans that helped put more Americans through college. But much of that money, it turns out, has been wasted. Unbelievably enough, the government has spent billions on interest payments to private banks instead of on needy students. This wasteful and at times scandal-plagued expenditure of taxpayer money finally ended with the approval this week of the federal budget reconciliation act. The new law will eliminate the private-lender subsidy and have the government make loans directly to students.

The change is expected to save more than $60 billion over 11 years, money that will be plowed into more student aid.

Up to now, the federal money was used to subsidize interest payments to the private lenders who actually made the loans. The government also guaranteed the loans. This has been a lucrative, risk-free profit center for private lenders, so desirable a business that they at times provided kickbacks to universities that would list them as preferred lenders. In some cases, financial aid officers at certain colleges held stock options in lending companies. After accusations by the attorney general of New York, several lenders and universities paid fines and agreed to a new code of conduct.

Any smart business leader knows that to cut costs, you cut out the middleman, yet this system persisted for years after the public became aware that billions of dollars were being spent to create banking profits rather than a better-educated nation. The profits in the student loan business were good enough for lenders to invest in lobbyists and campaign contributions, largely to GOP congressmen who now complain that the new law is a killer of private-sector jobs. In fact, the jobs were private sector only in name; they were paid for by taxpayers.

What the private lenders did provide was a range of loan packages to meet individual students' needs. There's no reason the federal government can't do the same, and for a lot more students with college dreams.



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