Government May Nationalize Student Loans
Jan 20th, 2010 @ 10:45 PM by Amber Nelson
There is a new bill being kicked around in Congress that would essentially exterminate the private student loan industry, paving the way for the government to make all loans directly to college students. It’s called the Student Aid and Fiscal Responsibility Act and it calls for the elimination of the Federal Family Education Loan (FFEL) program that has created millions of dollars of subsidized student loans each year.
Here’s how subsidized loans work: The government encourages lenders to loan money to students at low rates by promising to make up any profit losses or to repay the money if a student defaults. The government sets the interest rate the lenders can charge, but if the market rates rise above that fixed rate, the government must pay the lenders the difference between the two. But if rates fall below the set rate, then lenders must send back the extra profit made to the government. Such subsidized loans make up 80 percent of all student loans.
This new bill, authorized by the Obama administration, seeks to take out the private sector “middlemen” by having the government make the $103 billion worth of loans itself, rather than guarantee them. The reasoning is that it will save money on lender fees. The Congressional Budget Office originally estimated that the proposed system would save $87 billion over ten years.
However, a statement from the CBO shows that the first estimate did not include possible financial losses from defaults. The revised estimate was a total savings of only $47 billion.
Still $47 billion is quite a savings. The issue is whether or not the government can handle loaning money more efficiently and cost-effectively than the private sector. Based on past experience, the answer is most likely ‘not.’
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.