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Editorial: Time to streamline student lending

Student loan overhaul merits passage, but there are trade-offs.

Last update: October 5, 2009 - 12:04 PM

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BETHEL'S EXPERIENCE

"Our transition has been really, really easy. ...We signed up to participate in the (direct lending) program. In less than a week, maybe the next day, there was a Department of Education phone call saying, I am your go-to person and I will help you work through this transition. If you have questions, call me.''

Jeff Olson, director of financial aid at Bethel University in St. Paul

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Students were once thought to be such poor credit risks that it took a 1965 act of Congress to entice most banks into lending tuition money. Forty-four years after the federal government began guaranteeing student loans, the tables are turned. Congress is considering changes that would push private lenders out of the federal student loan business. Lenders are fighting hard to stay in it.

The historic legislation, championed by President Obama and approved by the U.S. House earlier this month, is a rare and welcome chance for Congress to actually streamline government instead of just talking about it. If approved by the Senate, the Student Loan and Fiscal Responsibility Act could save taxpayers $47 billion to $87 billion over the next 10 years by eliminating the middleman role private lenders play in federal education loans.

Families who now get their Stafford or parental PLUS loans through banks or credit unions or nonprofits such as Sallie Mae would instead borrow directly from the federal government, working through school financial aid offices just as they do now. Many Minnesotans already get their student loans this way. The federal government has provided direct student loan lending since the mid-1990s. The University of Minnesota Twin Cities and Duluth campuses were among the nation's early adopters.

Critics of the plan, such as Minnesota Republican Rep. John Kline, suggest that this legislation is yet another government takeover. In reality, the bill simply ends a taxpayer-financed program called the Family Federal Education Loan program (FFEL) that gives sweetheart deals to banks. "Private lenders make the loans with two separate subsidies from the federal government: a guaranteed interest rate that is determined through the political process -- not the markets -- and a guarantee against default losses,'' said Wisconsin Republican Rep. Tom Petri, one of the bill's champions, in a recent speech. "The profits are private, but the losses are socialized. FFEL is not free enterprise."

About $40 billion of the savings would be plowed back into Pell Grants for the nation's neediest students, raising the maximum student award by about $1,500 over the next decade. For far too long, funding for this vital program has shamefully lagged behind the skyrocketing costs of higher education. This bill is a step toward addressing that.

While Congress should pass the bill, the legislation's supporters should be more upfront about the trade-offs it may involve. There's widespread agreement that it will cost jobs in the financial industry -- estimates range from hundreds to thousands -- adding to the nation's unemployment problem. There's also uncertainty over having the U.S. Department of Education suddenly handle loans from thousands of new schools. Bethel University's recent painless switch from the FFEL program to direct lending inspires confidence. At the same time, expert Mark Kantrowitz, publisher of Finaid.org and Fastweb.com, said disruption or delays are likely at a small percentage of schools.

This welcome exercise in fiscal responsibility could also go awry if Congress doesn't exercise caution in spending the savings generated by the bill -- a valid criticism raised by Kline and others. Plans based on upper-end savings estimates call for funding additional educational programs -- community colleges and early childhood programs are among the beneficiaries. But what if all the savings don't materialize? Then Congress will be back in familiar territory, spending more money than it has. A more sensible approach to spending on new programs is in order, and could help win additional votes in the Senate, where support for the bill is less hearty than it was in the House.

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