Outside editorial: Invest in education, reform loan program

Posted: Friday, May 15, 2009

With the cost of a college education soaring all over the country, reforming college-loan plans is taking on a new urgency. Fortunately, there is a proposal on the table that won't be a burden on taxpayers and could ease the staggering debt load for young people entering the workplace. This should be a no-brainer for Congress. When it comes to legislation, though, nothing is ever easy.

College students and their families need no reminder that it's harder than ever to pay for a four- or five-year education. College tuition has risen at a clip of 58 percent since 2000, faster than inflation. Close to 70 percent of students borrow for their education, and they owe an average of $20,000. Doctors, lawyers and those with graduate degrees can easily end up owing well over $100,000.

The result is that thousands of students either forgo college altogether or drop out because they can't afford it. Many of those who do graduate find themselves years later still paying off college loans when they should be saving for their own kids' educations.

One part of President Barack Obama's proposed reform would enlarge the pool of loans by cutting out the middlemen - principally, banks. Private lenders get a public subsidy under the Federal Family Education Loan program, which accounts for more than two-thirds of student borrowing. Taxpayers guarantee the lender 97 percent of the loan if there is a default, so the risk to private lenders is small. Cutting out the middlemen - who would surely put up a fight in Congress - would save at least $4 billion per year.

At present, students are forced to borrow at subsidized rates of 4 percent to 5 percent, even when banks themselves are borrowing from the government at 1 percent. When the limited pool of money is exhausted, they must turn to the private market, where rates are much higher.

The money saved by direct lending from the government would significantly enlarge the amount of money available from the government.

Obama has proposed to use the savings by enlarging Pell Grants made to needy students - which don't have to be repaid - from $5,000 to $5,500. That's not a huge difference, considering that when the Pell program started in the 1960s it paid for 70 percent of the costs of college. But it's a start. The government also needs to lower interest rates for student loans - how about 1 percent? - and ensure that the maximum value of Pell Grants is tied to inflation.

Young people are the future of the country. The current economic crisis is not of their making, but they're paying for it anyway. The least government can do for them is to remove financial obstacles to a college education.

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