Congress May Cut Banks from Student Loan Business

In a move that may have profound impacts in the ways students pay for college, the House of Representatives has recently voted on a bill that would seriously limit the ability of private lenders to benefit from the highly subsidized and often government-backed student loan industry.

The current bill would end the Federal Family Education Loan Program (FFELP) – a fixture of government involvement in student lending for decades. While the program does help students with unmet financial need acquire the funding they require for education, it also provides massive profitability to participating banks. These guaranteed profits have been a constant source of criticism and controversy. If a student is unable to repay such a loan, the government will reimburse the lender for a significant portion of the borrowed amount – and the student will still be liable to repay the loan when he or she is once again able.

The effect of having a middle-man in what is essentially a government sponsored loan program is almost certainly an issue of waste. Especially these days, when bankers are becoming known as particularly over-paid and increasingly reliant on government backing in order to keep their business running. This is good news for the students in the long run, because without an extra level of management in the private sector who are ultimately loyal to shareholders, the government will be able to disburse more money directly to the students and colleges who we’re supposed to be funding in the first place. As the government takes a more direct role in lending through public programs, interest rates are likely to decline. Even taxpayers will save money through the reform, because fewer dollars will have to be collected to provide the same amount of actual education funding.

Critics are already complaining that the new alignment of lending will amount to a “government takeover,” but the programs in question would not exist were it not for tens of billions of dollars in annual federal spending. Complaining about government intervention in FFELP is like those protesters who say “government should get out of Medicare.”

The Senate is currently drafting a complementary bill and when that legislative draft is completed and approved, a compromise will be written between the two houses. Obama has already pledged to put student loan reform high on his list of first-term priorities, so there is little doubt that he will sign such a bill when and if it emerges from both houses of Congress.