Student Loans: The Next Government Takeover?

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Student Loans: The Next Government Takeover?
By Mark Willen

Within the next several weeks, the Senate will take up a House-passed bill that completely revamps the student loan program. The raucous debate will sound a lot like the health care debate -- with opponents attacking it as just another big government takeover. That's not a complete lie -- but it's far from a complete truth. And it does nothing to help spur the nuanced debate this bill deserves.

The House last week passed a bill that would set up the government as the sole provider of student loans. Private lenders would be left out in the cold, although they'd still be able to make a little money servicing government loans.

It will come as no surprise that the bill was passed on a mostly party line vote of 253-171, with Republicans lambasting the approach as "a single payer system" and "a public option" that would muscle out the private lenders. "This bill is an expansion of the government ... a government takeover of an industry," said Representative John Kline of Minnesota, the senior Republican on the Education committee.

Democrats argue that if ever a takeover were needed, this is the case. In fact, though, it's not a takeover at all because the government is already in charge. Under the current system, private lenders have their cake and eat it, too. The federal government pays banks a subsidy to lend to students and then guarantees the loans, so banks have no skin in the game at all. The federal government assumes all the risk, and the banks take all the profit.

The bill would just eliminate the middle man and let the federal government make the loans directly. Why on earth not? There is a downside, private lending jobs will be lost throughout the country with new jobs added in Washington. That's a serious problem, and it may be enough to sink the bill in the Senate, where opposition is strong in states that can't afford to lose another job (which is a lot of them).

The bill would save an estimated $87 billion over 10 years and use it to increase aid to low-income students and provide grants to community colleges for innovative programs. Republicans object to that, too, arguing that grants to community colleges would undermine their most important benefit -- their responsiveness to local needs.

The bottom line, is essence is that under the House bill, the government would be taking $87 billion out of the pockets of banks and putting it in the pockets of young people and the schools they attend. That would be unfair if the private lenders were willing to go it on their own, but they're not. It just makes no sense to insist on government guarantees of student loans at the same time as you're howling about a big government intrusion.

But this isn't to suggest the House version of the bill is perfect. It does contain provisions that need to be discussed. Maybe the community college grants should come with fewer strings attached so schools can better meet local needs. Some provisions in the bill would push schools to create math programs for pre-schoolers, and that might be a decision better left in the hands of local administrators. Other provisions would use federal money for school reconstruction, adding to the deficit. These ideas are worthy of serious debate. Too bad that's near impossible in this political climate.