Revamping student loans

Friday, April 17, 2009 | 2:09 a.m.

Many banks and other lending companies that receive government subsidies and payback guarantees in exchange for providing student loans are opposing a plan by President Barack Obama.

Their opposition is understandable, as the president wants to eliminate their profitable roles as middlemen in this program that enables millions of people to pay for college.

Obama’s plan, which would have all student loans coming directly from the federal government, is outlined in his proposed fiscal year 2010 budget. The president and his budget analysts say the plan would save more than $9 billion a year, money that could be used to increase federal higher-education grants for students from low-income households.

Currently, there are two types of student loans — direct loans from the Education Department and loans made through the Federal Family Education Loan Program, or FFELP, which uses private lending companies.

Direct loans were introduced early in the Clinton administration as a way of reducing costs. Colleges and universities, however, were given the power to offer either of the programs to their students. This way, no big and sudden losses would be felt by lending companies, including SLM Corp., better known as Sallie Mae, which provides more student loans than any other lender in the country.

Unfortunately, a gradual, expected shift toward the less costly direct loans did not happen. Ten years after direct loans were introduced, U.S. News and World Report magazine reported that lenders were heavily lobbying members of Congress, as well as colleges and universities, to align with FFELP.

For private lending institutions, FFELP is a bonanza. The government guarantees a profitable rate of return and that lenders will receive all unpaid interest and 97 percent of the outstanding principal if students default on their loans.

The purpose of student loans is to ensure that academically qualified students have access to higher education, not to subsidize private lenders with taxpayer money. Congress should jump at this chance to use billions of dollars in savings to increase federal educational grants.