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Education Reporter

House Approves Bill to Exclude Private Lenders from Student Loans
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Congress may soon pass a bill that could replace most privately administered student loans with loans from the Federal Direct Loan Program. On September 17, the U.S. House passed the Student Aid and Fiscal Responsibility Act, authored by Rep. George Miller (D-CA). The bill, if it passes the Senate, will make major changes to the student loan industry and dole out tens of billions of new dollars to a variety of grant and loan programs.

The editors of the Wall Street Journal took the lead in drawing parallels between this potential government takeover of the student loan industry and Democrats' efforts to create a single-payer, publicly funded health care system. "Simply put, we are watching in student loans exactly what ObamaCare's harshest critics have forecast for health care: a 'public option' that ultimately destroys all competition," the editors wrote. Through Medicare and Medicaid, government already spends 41 cents of every dollar spent on health care in the United States. The federal government also either guarantees or issues about 80% of student loans through interest-free or low-interest subsidies and grant programs. "Not by coincidence, higher education costs have risen much faster even than in the health-care market," Journal editors report. "From 1982 through 2007, college tuition and fees increased 439% in nominal dollars, almost triple the rise in median family income."

The Wall Street Journal is just one of many critics who have asserted that infusions of federal money have created a huge disincentive for universities to keep costs down to a level that students and their families can afford without recourse to publicly subsidized loans. Such lending practices also disadvantage many of the students they purport to help, since these practices leave many B.A.s, and even Ph.D.s, lawyers, and M.D.s, with tens of thousands of dollars of loans out of all proportion to the salaries they receive after graduation. (See Education Reporter April 2009, Forbes 2-2-09)

Sarah Bauder, director of the University of Maryland's financial aid office, told Congress that "the perils and costs associated with moving entirely to one loan system for students need to be re-evaluated." For one thing, said Bauder, private lenders work rigorously to prevent defaults on loans, while the Department of Education demonstrably does not. Financial aid officials from 14 schools, including Notre Dame and UCLA, wrote a letter to Congress warning of the "unintended consequences that come from basing reform on current political pressures without sufficient consideration of what best serves the interests of all stakeholders — students, parents, schools, and taxpayers."

Rep. Miller's plan starts with eliminating all government-backed loans through private lenders, and then goes much further in providing a taxpayer-funded bonanza for both students and universities. The plan locks in 3.4% interest rates on some students' Stafford Loans. The bill also has students who receive another type of federal loan benefiting from a lower rate if interest rates fall, and a cap on students' rates — meaning taxpayers will bear the burden — if interest rates rise. Obviously, no private student loan company can compete with the practices of a lender with this kind of power to lavish money from public coffers on students and graduates.

"What we have here is Congress aiding, abetting and obfuscating a government takeover of an industry," assert the editors of the Wall Street Journal. "It has grown difficult for Mr. Obama to deny that he favors a single-payer system. The question is how much of the U.S. economy will have to live under it." (Wall Street Journal, 8-20-09)

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