Picking Students Over Banks

October 7, 2009

In the next few weeks, the US Senate will review the House-approved Student Aid and Fiscal Responsibility Act. We should all hope that the Senate will move quickly to pass this legislation as-is. The bill expands student loan programs by ending subsidies to private lenders who, for too long, have been turning a tidy profit on the Federal Family Education Loan Program (FFELP). Killing FFELP is a small sacrifice of mostly nostalgic significance. In the wake of controversial bailouts to the financial sector, the idea of continuing, what essentially amounts to a grab-bag for lenders, seems utterly out of tune. But even without TARP’s bad aftertaste, ending subsidies to financial institutions makes sense.

There are a host of reasons why.

The most obvious is money. According to the Congressional Budget Office, the government will save close to $87 billion over 10 years. Those savings will fund lower interest rates for students and add roughly $40 billion in additional Pell Grants. Since these grants are not repaid, more young Americans will enter the workforce with less debt. This is significant when you consider that Americans carry more individual debt than any nation in the world and that the current economic crisis is closely tied to this predicament.

The new act will be relatively painless. The government already runs direct loan programs and has the capacity to manage more. Getting rid of the middle man is just a good business decision. Keeping the subsidies alive at the behest of banks and their advocates follows a perverse logic that suggests national spending priorities are designed to sustain overhead, not achieve results. The priority should be on expanding access to education, not funding banks.

Oddly enough, it seems the government may even do a better job of getting its student loan money back. If current trends are anything to go by, ending FFELP will actually help curb rising student loan defaults. Even before the current recession, subsidized loans defaulted at a greater rate than direct loans. While all default rates for all loans have increased since the recession hit, recent Department of Education data shows default rates on subsidized private student loans are accelerating at a much faster rate than direct loans.

The poor default rates on private loans are only part of the picture. Even more alarming are the rising college drop-out rates in America. Often citing debt as a major reason for dropping out, more and more young Americans are leaving school without their degrees or diplomas. In 1965, When FFELP was enacted, the college dropout rate in the United States was 20%. Today, the Department of Education estimates that 50% of college entrants never graduate. It’s a telling equation: although more and more students take subsidized private loans, fewer and fewer are graduating.

The bill will do more than save money or curb drop out rates. It will expand access to higher education and reshape America’s workforce. Pell grants help fund undergraduate study and technical training that could revolutionize a US workforce that is losing pace against China, India and others. America has the best private universities and colleges in the world. Ending subsidized loans will not change that. It will give more Americans access to that education and improve other higher education programs such as community colleges and technical schools.

It’s no surprise that the bill’s main criticisms come from the financial services industry and their stalwarts on Capitol Hill. FFELP has been a sweet deal for many of them. In the absence of any substantive arguments for maintaining subsidies, the scattered objections to the new bill verge on the ridiculous: students will need to sign a form in person; government bureaucracy will confuse students, and so on.

Thankfully, this one does not need to be debated along the traditional grow-vs.-shrink-government-line. This is not a government takeover. Banks can, and will, continue to loan money to students. Unless they have a personal fortunate, most post graduate student in America borrow money from banks. Banks will continue to service the financial needs of such students.

But the banks are not who the Senate need to think about. This bill is about America’s schools, her students, her very future. Ending subsidies and providing more funding for education and training is critical. Congress knows this. Opposition to the bill is flaccid and, despite the de rigueur partisan House vote count last month, nobody is really fighting to keep FFELP. The reasons are obvious, and the Senate would do well to act accordingly.