Ending the Student Loan Boondoggle

There are few taxpayer ripoffs as brazen and long-standing as the student loan program. Now that President Obama plans to shut down the banking industry’s parasitic dependence on this program, worth tens of billions of dollars in risk-free profits, the banking industry is raising a ruckus about “socialism” and the fate of capitalism. Sorry, guys, we’ve been there before. This time the jig is up.

In the 1970s, the U.S. Government provided low-interest, guaranteed loans to students as a way to help young people finance their educations. It was a public service of government because banks weren’t interested in making student loans. Then Ronald Reagan became president and decided to privatize the program. The rationale was that banks would compete to provide loans, which in turn would result in better service and lower interest rates: the classic free-market line.

But Reagan’s plan was actually a free-market sham. It privatized loan profits while retaining billions of dollars in direct government subsidies. It was and is a straight-up ripoff of taxpayers and students alike.

The so-called competition to make student loans didn’t quite materialize as free-market theorists said it would. Banks soon raised interests rates to students, notwithstanding the government loan subsidies, and charged students as much as possible. As one commentator notes,

“Pretty soon student-loan interest rates doubled; Sallie Mae [the largest private corporation providing student loans] was taking 43 percent returns without risk in the expanding $85 billion industry; university financial aid officers were being wined and dined by companies like Student Loan Xpress to promote their “products”; the personal data of borrowers was being illegally mined by the banks and their marketers; and lender lobbyists were working over time to defeat any reform.

“In the last couple of years, as lawmakers finally began to bear down, universities and lenders wrote fast settlement checks to halt investigations and campus queen Sallie Mae attempted to sell herself to private investors so the public would have no right to look into her books, a deal that collapsed as the big-time lender’s woes came increasingly to light.”

How wasteful was the student loan program?

The Congressional Budget Office estimates that the country would save $94 billion over the next decade by switching all of the bank-made loans over to direct lending. Such loans would be made directly by colleges; loans would then be serviced by private companies.

Going to direct lending would save students a bundle, too. A Government Accountability Office study in 2005 found that the federal government’s cost for loans made through private banks is $9.20 per $100 in loans, compared with $1.70 per $100 in the direct loan program.

A lot of that fat was subsidizing the corruption of college financial aid officers. They were steering students to the guaranteed loan program and reaping all sorts of meals, junkets, kickbacks and other favors from banks making government-guaranteed loans. The web of corruption grew while student indebtedness climbed.

Of course, the banking industry is now apoplectic that it may be forced off the government dole. It is now fulminating about “nationalization” of lending and “socialism,” and warning that the proposed shift to direct lending will destroy thousands of jobs.

Baloney. The guaranteed student loan program has been a national embarrassment, a massive scandal and an enormous waste of money. It shows how far empirically vacuous claims can take you so long as you have strong political connections. While touting competition and quality, banks who provided guaranteed student loans provided inferior service at higher costs, There are enormous hidden subsidies and greater corruption than the direct-lending program. Eliminating banks as a gratuitous, expensive and ethically challenged middleman is the obvious thing to do.

When the vote on the Obama plan occurs in the coming weeks, it will be worth checking to see which Senators and Representatives actually vote for it. Their names will constitute a fairly distilled list of self-deluding hypocrites — the kind of legislators who will never let the facts get in the way of their threadbare ideology or political friendships. It’s about time that this flagrant ripoff of taxpayers and students be terminated.

Originally published by David Bollier at Onthecommons.org under a Creative Commons Attribution license.