Drowning in debt
How privatization and the rise of a for-profit loan industry hurts students
Tyler Zimmer
Issue date: 12/8/06 Section: Opinion
The current student loan situation consists of two competing social programs: the Federal Family Education Loan Program (FFELP) and the Direct Loan program. FFELP is a privatized loan program which is set up to subsidize the risk that the private lender (e.g., Sallie Mae, Citibank) takes on by lending the money. That is, the government guarantees their profits by paying for all loans regardless of whether or not the borrower can pay, so that this billion-dollar industry is in a no-lose situation. There is also a provision in President Bush's 2007 budget proposal that gives "special allowances" to lenders to "ensure that they get a guaranteed rate of return on their loans." This is a good example of how the priorities of privatized programs like FFELP seem more geared toward ensuring that the student loan industry does well than toward the goal of making college more affordable. Inducing private lenders to take on riskier borrowers is better than doing nothing to aid students, but we can certainly do better than this.
In contrast, the Direct Loans program is not privatized but instead works directly through the government, thus eliminating the need to involve private lenders. Backers of these loans argue they would save the federal government money by eliminating the corporate giveaways that the FFELP loans produce for private lenders. The fact that this program doesn't involve a billion dollar for-profit industry seems to favor students interests more than FFELP loans.
However, while the Direct Loan program seems to be more responsive to the interests of student borrowers and less contrived for the profit of private lenders, the fact that loans (instead of grants) make up the large majority of federal student aid is indicative of a huge shift in thinking from the time that federal aid was first established. The G.I. Bill notwithstanding, federal student aid was first created as part of LBJ's Great Society legislative agenda as an expression of the staunch post-war progressivism which saw higher education for all citizens as a source of myriad societal goods. We have this same legislative revolution to thank for such tremendous achievements as Medicare, Medicaid, National Endowment for the Arts and Humanities, numerous environmental protection measures and consumer protection laws, as well as a "War on Poverty" which cut poverty rates in half.
In contrast, the Direct Loans program is not privatized but instead works directly through the government, thus eliminating the need to involve private lenders. Backers of these loans argue they would save the federal government money by eliminating the corporate giveaways that the FFELP loans produce for private lenders. The fact that this program doesn't involve a billion dollar for-profit industry seems to favor students interests more than FFELP loans.
However, while the Direct Loan program seems to be more responsive to the interests of student borrowers and less contrived for the profit of private lenders, the fact that loans (instead of grants) make up the large majority of federal student aid is indicative of a huge shift in thinking from the time that federal aid was first established. The G.I. Bill notwithstanding, federal student aid was first created as part of LBJ's Great Society legislative agenda as an expression of the staunch post-war progressivism which saw higher education for all citizens as a source of myriad societal goods. We have this same legislative revolution to thank for such tremendous achievements as Medicare, Medicaid, National Endowment for the Arts and Humanities, numerous environmental protection measures and consumer protection laws, as well as a "War on Poverty" which cut poverty rates in half.
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