Obama Wants To Cut Out College Loan Middle Men

By Justin Gardner | Related entries in Education, Money

Yet another way we could save billions every year and get them back into the hands of those who need them most.

From AP:

Obama wants to end the decades-old, dual system the federal government uses to advance loans to students to pay for college. Under that system, students at some colleges borrow directly from the government, while others get loans from banks, nonprofits or state agencies that in turn receive subsidies from Washington.

The president’s proposal would switch the federal student loan system entirely to direct lending from the government.

Obama has claimed that the change would save at least $48 billion over the next 10 years — money that could be funneled to student aid. But Republicans are concerned about the costs of that and even some Democratic lawmakers oppose the switch.

I don’t anticipate that this will be an easy fight because that’s A LOT of money to be pulling away from some pretty powerful interests, but the idea does make sense…especially if we want more folks going to college.

Your thoughts?


This entry was posted on Friday, April 24th, 2009 and is filed under Education, Money. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

10 Responses to “Obama Wants To Cut Out College Loan Middle Men”

  1. Mike Casey Says:

    If it cuts costs, it cuts costs and that definitely a positive. But if its only realitistic in theory, there’s no use in doing it. Plus it might become too overbearing and cripple possible attractive private loaner alternatives.

  2. Mike Says:

    I don’t see how you can get around the fact that this is basically making the government a huge bank. Of course it is cheaper than subsidizing banks, because if the government is the bank, then they get paid the interest, so they will be making money which the banks used to make. So yeah, it’s cheaper. It’s also anti-capitalism (I won’t use the “s” word for everyone’s sake), and while capitalism is under fire these days, let’s not forget that it has many benefits that has helped us become a prosperous nation compared to others. Mike Casey hinted at one problem of undercutting private market alternatives, thus creating a monopoly.

    I’m not opposed to government policy that encourages/subsidizes education, since an educated public is obviously good for society, and because I don’t believe access to education should be entirely at the will of the free market. However, I definitely worry about this policy. Yes, it will save us money, at least in theory, but so would starting up government-owned gas stations, supermarkets, etc., and there’s a reason we don’t do that.

  3. Kevin Jackson Says:

    Mike-

    Taking the risk, giving less benefit to the taxpayers and guaranteeing a profit to the private sector might be considered a rather perverted capitalism.

  4. Joe Says:

    As someone with various student loans, I can say this is a great idea.

    I’ve got both types of loans in repayment now. My government provided loan is at a 1.8% interest rate. My government subsidized loans average at about 7.5%. I got them all within the same time frame.

    The only people who could possible be against Obama’s plan are people with vested interests in the student loan industry. That’s 6% interest a year (plus subsidies) that they’d be losing. And people who put themselves through college, like me, wouldn’t have to work for 10 years just to get out of debt.

  5. Mike Says:

    True. I never said I liked the system as it is either. It seems wrong to me, and anti-American if I may use such a loaded term, that someone’s access to education (at least up to a certain age) should have anything to do with the economic status of their parents. Although that it is a an anti-capitalist statement, it recognizes that the right to opportunity for each individual is a more fundamental American ideal than free markets. But that ideal is far from the current system, so I am more than open to change.

    Maybe this could be a step in the right direction, but, like I said in my first comment, I worry about it. It seems to me to combine the worst of both worlds: it doesn’t make college more affordable, and it also creates a monopoly.

  6. Jim S Says:

    The thing is that “free markets” in this situation is essentially a meaningless catch phrase. The source of the loans is at its core the government. Rules are set because of that fact that limits what the middlemen can do, except take their cut. The point of free markets is innovation, change and competition and none of those really apply in this situation. None of the middlemen are really making a major contribution in any of those ways to the program, they just want a cut of the pie that leaving them out of the mix leaves for students.

  7. ExiledIndependent Says:

    But access to education, as it stands today, is absolutely tied to the parents financial status. Wealthy DC types don’t send their kids to public school, they use their money to send them to private schools. So if we’re talking about true equality of opportunity, then either private schools need to go or the average person must be given a mechanism to send their children to private schools without the financial obligation. Or we let the status quo stand.

    In general (and general is often dangerous), turning the government into a bank has deep inherent risks of its own. The student loan process–and higher education itself–instantly becomes more political and politicized by several orders of magnitude. It opens up government control of where students get their education, what kind of education they get, what they do with that education post-graduation. It gives the government even more leverage over the learning institutions themselves if they choose to allocate student loan availability based on the university’s curriculum. Don’t teach a certain course? You don’t get as many (or any) student loans available to your students.

    The politicization of the housing market caused the mortgage crash we’re experiencing right now, and I worry that, historically, most things the government tries to control turn to crap–inefficiencies, poor service, lackluster results.

    So, while I’m all for additional mechanisms to give students the access to a university education of their choosing, we need to explore options other than the federal government.

  8. ffbull Says:

    While I don’t believe the government should be in the business of lending money, I also don’t think the government should be lending money to banks at 1% in order for the bank to lend it out at 7% or more.

    “even some Democratic lawmakers oppose the switch.”

    When Republicrats agree, the banks are happy and the taxpayer gets hammered. We really do have a one party system.

    I say that any money you spend on your child’s education should be a tax credit. (Meaning it comes directly off your tax bill and not simply adjusting your income.) Ah heck, let’s just end the personal income tax altogether.

  9. jmalutinok Says:

    Maybe it’s time we started trusting the government. (cue “anti-capitalist” rage). Seriously though, if we’re going to pass reform in this country, we’ve got to get behind the idea that our government might well be able to provide things that “capitalism,” or “the free market,” or whatever else you want to call it cannot.

    Would you call Britain socialist (or Mike, anti-capitalism)? They’ve got pretty much universal healthcare.

    Washington has made a lot of mistakes in the past but if we are moving toward system reform-if that’s what we really want, then we will have to believe in Capitol Hill’s power to change things.

  10. Mike Says:

    “Would you call Britain socialist (or Mike, anti-capitalism)? They’ve got pretty much universal healthcare.”

    I would call that policy anti-capitalism, yes. I think that’s pretty clear.

    And I agree that there are problems that the free market cannot solve, at least not without regulation. I’ve written about the flaws of free market ideology on my blog (search for “freedom fairness”), where I cite both healthcare and education as examples where there is clearly a need for some outside force to control the whims of the free market. Therefore, we do need to debate how much government involvement there needs to be in various issues. However, we should not just ignore the benefits of capitalism in such debates, and assume that just by getting rid of the profit margin, we will always have a more efficient system. If that were the case then we’d all be better off if the government ran everything.

    (My original comment was caught in moderation, I think because of a link, so this is a re-post without the link)

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