The Student Loan Scam

The federal college loan program that pays private lenders a generous subsidy to make loans that are guaranteed by the government is an enormous waste of money that has long served more to enrich lenders than to help students.

Nevertheless, the Republican leadership in Congress is opposing a House bill that would save the country nearly $90 billion in the next decade by ending this program and allowing students to borrow directly from the government through colleges.

The subsidy program was created when lenders were showing little interest in the college loan program and was intended to make sure that young people could get loans when times were tough. This expensive strategy failed outright during the credit crunch when the federal government had to buy outstanding loans to keep new loans available to students. The direct lending system, which was already known to be cheaper, needed no such rescue.

A bill introduced by Representative George Miller, a Democrat of California, would end the unnecessary private lending subsidies and plow the savings into important education programs. The bill, for example, devotes $40 billion to the all-important Pell grant program, which has allowed millions of poor and working-class students to attend college.

It would spend $8 billion on early-education programs and $10 billion on an initiative aimed at strengthening community colleges. It sets aside $4 billion for a school modernization and improvement program.

The consolidated program proposed in the bill would in no way expand government. The loans would be handled through colleges. They would be serviced and collected by private companies and nonprofits that are already lining up to get the work. By forcing the companies to compete, and to undergo periodic re-evaluations, Congress could get a good deal for taxpayers and better service for borrowers.

The arguments for passing this bill and ending the subsidy program are powerful. But the Republican leadership has distorted the debate by describing the bill as a plan for pushing private capital out of student lending. It would be more accurate to describe it as a plan for pushing corporate welfare out of student lending.

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