How banks rip off college students and the government.

Slate ^ | Sept. 15, 2007 | Michael Kinsley

[Lorianne]

If you know anything at all about the federal student loan program, you will not have been surprised by the scandal of recent months. The only amazing thing is that it has taken so long to arrive. Here's how the program works: Banks and other private companies lend money to students. The federal government pays part or all of the interest—currently 7 percent or 8 percent. The government also guarantees the loans.

What is wrong with this picture? Well, the government itself borrows the odd nickel to finance the national debt. This borrowing, obviously, is also guaranteed by the government. For that reason, it carries an interest rate of only 3 percent or 4 percent. If the government can borrow money at 3 percent or 4 percent, why should it be paying 7 percent or 8 percent for the privilege of guaranteeing loans to someone else? Wouldn't it make more sense for the government to loan out the money itself?

That is the $4 billion question (the approximate annual cost of the interest subsidy). And the answer is: Of course that would make more sense. It is what any levelheaded businessperson would do. And what is stopping the government from behaving like a levelheaded businessperson? Not those head-in-the-clouds Democrats. It's Republicans, who adopted the student loan "industry" in its infancy, like a stray cat, and have nurtured it and protected it ever since.

There actually is a parallel student loan program that does use government funds. It was started in the early days of the Clinton administration. It costs less to operate, and it has not been tainted by scandal. But when the Republicans regained control of Congress in 1994, they pushed through a law forbidding the Education Department to encourage the use of this program.

[Lorianne]

Oink oink.

[businessprofessor]

The scandal is almost entirely fictional. There were no documented cases in which students were harmed. University costs will increase because call centers, staffed by private lenders, are now disbanded. Students will probably be harmed because universities will not be able to handle peak loads involving student loan issues.

The direct lending program could not handle student loan volumes. The private lending market is much more efficient.

This phony crisis is just another attempt to punish an unfavored industry. Big oil, big pharm, and big student loan are targeted industries.

[Orange1998]

This article is full of it. The 3 or 4 percent spread is much cheaper than a government ran enterprise. It amazing how no one remembers how inefficient government can be.

Let the government run the program.... it works every time. sarc.

[stylin19a]

The Health Education Assistance Act, 1963, which offered loans to medical and health program students.

The College Work-Study Program, 1964 (now called the Federal Work-Study Program). In this program, the federal government pays for most of students’ earnings so, in effect it covers their educational expenses.

The Educational Opportunity Grant Program, 1965, which was created specifically for low-income students who couldn’t afford college. No repayment was required.

The Guaranteed Student Loan (GSL) Program, 1965, which is also still in effect today. It’s name was changed in 1988 to the Federal Stafford Loan Program. This program provided more money for student loans through banks or lending agencies, to offset rising education costs.

The Middle Assistance Act, 1978, provided student loans to middle-class families. This act, in effect, removed the income limit on federal aid programs.

The Parent Loans for Undergraduate Students Program, 1981, allowed upper-income families to get student loans, but at much higher interest rates.

1963, 1964, 1965, 1978, 1981...yep...all Republicans. <*SARC OFF>

[ExSES]

The direct lending program could not handle student loan volumes. The private lending market is much more efficient.

While true..., there is (and always has been) a major problem in student loan programs! Far too many "Diploma Mill" operations continue to prey on the ignorant (and ultimately the taxpayers when students default!!!)

[businessprofessor]

I do not doubt that unqualified educational institutions exist. These institutions would exist in a public or private student loan industry. The dims are trying to reduce the size of the private student loan industry and make the remaining players increase political donations to the Dims.

[ExSES]

The dims are trying to reduce the size of the private student loan industry and make the remaining players increase political donations to the Dims.

I fully agree!

[LoneRangerMassachusetts]

The scam actually goes like this. College loan consultants fan out every year at high schools telling parents how to get financial aid. They tell you to mortgage your house to the hilt to dry up your liquid assets. This is good news for the banks. They get a fresh source of capital every year. Your kid gets a student loan in return, more money for hte banks. You get to pay the taxes that pay for poor kids to go to school and get a degree in cultural or social studies and learn the rudiments of Marxism. Harvard becomes richer than most countries in the world. Don’t forget you the donkey, the middle-class worker who does not complain gets to carry the load for everyone.

[dawn53]

We recently inquired into a student loan for our son for grad school (he was on scholarship for his BA, so we haven’t contributed to his education so far.) We found that because of our income level, the loan would be non-subsidized, i.e. interest is accrued from the start, however, the loan is still not payable till post graduation. The loan is actually in the student’s name, and when repaid boosts the student’s credit. We never got as far as actually applying because he received a graduate assistantship position, so his tuition is going to be covered. The interest rate was going to be somewhere around 7.5% for the student loan. Never was it suggested to us to take a home equity loan, we had just the opposite advice from the university and that was to put the loan in the student’s name because many employers are “paying off” graduate student loans as an incentive when hiring. Of course, we’ll never know if this info was correct because we aren’t going to apply.

[sergeantdave]

Student loans are pernicious. Government should butt out and let students sink or swim through their own devices. If people want to speculate on the future, buy corn options on the exchange or beanie babies on ebay.

Idiots.

[scrabblehack]

At least with the student loan program, the student actually gets the money. With College Work-Study, the college merely has to consider hiring the student.