It would seem a simple enough proposition -- student loans should go to students. In practice though, that's not often what happens.
Under what's called the Federal Family Education Loan Program, the government gives money to banks in the form of subsidies to encourage them to lend money to students. Then the government guarantees all the loans so there's no risk for the banks. Just tax-subsidized profits.
You might assume that employing private banks to market and administer student loans adds efficiency and economies of scale to the federal program. The usual rhetoric has it that the private sector is always more efficient than the government because it can reduce the risks of loss. Not so in this case.
If you're thinking there must be a better way, there is. It's called direct lending, and it slashes overhead and administrative costs by cutting out the middleman and lending to students directly. Not only is this program more efficient; it also allows for more flexibility and incentives, such as loan forgiveness for students who pursue public service careers.
It isn't hard to guess which of the two programs the University of Minnesota eliminated 14 years ago.
This is yet another example of Minnesota taking simple, sensible steps to save money and serve our goals.
If schools across the country followed suit and handled loans the way we do at the U, the nation would save $87 billion over the next decade.
One of us (Durenberger) joined with then-Sen. Paul Simon, D-Ill., to put an end to the wasteful practices of the Federal Family Education Loan Program in the early 1990s. Lobbyists for the banks and the secondary market maker -- Sallie Mae -- joined forces to try to defeat the effort. In conference with the House, we were able to create the Direct Lending program to provide institutions of higher learning and students with a better option than the wasteful Federal Family Education Loan program.
But the banking industry's success at protecting the Federal Family Education Loan Program from elimination was an $87 billion victory, the amount of additional taxpayer dollars it costs to provide federally guaranteed profits to the banks. To make matters worse, the new competition between Direct Lending and the guaranteed loan program provoked a variety of special deals between university lending officials and some banks about which much has been written in the last couple years.
What Minnesota family is not deeply concerned about the escalating cost of higher education? At such a time it is critically important that every tax dollar spent on improving access for students be wisely spent. The $87 billion spent on bank lending has not improved access to education. But it could fund an increase in Pell Grants by $1,150 per student by 2019. It would also allow us to expand low-interest loans for students with financial needs, make historic investments to increase access and degree completion in two and four year colleges, and reduce the deficit -- all at the same time. And with the savings we have left over, we could improve access to early childhood education programs that give kids a head start on the path to college.
We come from different political backgrounds, but this should not be a partisan issue. It's about who should benefit from student aid. We think it should be students.
President Obama has made the replacement of the bloated Federal Family Education Loan Program a key part of his agenda. The legislation already passed the House and the Senate will consider it this month. We hope that Sen. Franken's colleagues will join him to finish the job Sen. Durenberger started.
Al Franken, a Democrat, represents Minnesota in the U.S. Senate. David Durenberger, a Republican, served there from 1978-1995.
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