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Saturday, March 27, 2010

Feds Cut Subsidies for Banks on Student Loans: What's Not to Love?

My neighbor and 9/12 Project advocate Linda McIntyre is certain that the student loan reform passed as part of health care reform (I know—sausage) is just more awful nationalization of the free market. (Interestingly, she also said it had "no chance of passing"... but wouldn't have attaching such a bill to health care reform have made it harder to pass health care reform? I'm confused on strategy there.) Good local Republican Rod Goeman also characterizes student loan reform as another expansion of the inherently inefficient federal government. Adam Feser and Tony Amert do a fine job of explaining the alternate viewpoint (a.k.a., the truth).

Further support for the argument the student loan reform is one of the most obvious good things about this week's legislation comes from McClatchy's David Lightman:

Students and their families should find the student loan process simpler, and lower-income students should find more financial help, under the sweeping changes tucked into the health-care legislation that Congress passed this week.

The measure, aimed at taking banks and other private lenders out of the lucrative federal subsidized student-loan market, also would lessen the burden for some graduates as they pay back their loans.

Currently, certain students with low incomes and large loan balances don't have to pay more than 15 percent of their incomes each month on the loans. The new law will lower that to 10 percent [David Lightman, "Student loans should be simpler under new law," McClatchy via Yahoo News, 2010.03.26].

Exactly as Tony stated, students still have total choice to seek private student loans; banks offering such loans simply won't get federal subsidies. As Senator Tom Harkin explains, why should we support contuinuing "a subsidy to the big banks in this country?... We take that money and give it to students in Pell grants."

In the same article, fellow liberal Pedro de la Torre of the Center for American Progress says, "We've known for decades that subsidies are unnecessary and expensive, and special interest lobbying has kept these provisions on the books."

Even if good conservatives like Linda and Rod question giving grants to students or anyone else, they can certainly support bucking special interests and eliminating unnecessary and expensive federal subsidies to big corporations... can't they?

Update 12:19 CDT: But now over half the universities in the country to switch over their financial aid computer systems by July 1. Disaster waiting to happen, right?

Some aid administrators whose schools have converted said the transition was painless. It involved, they said, computer system adjustments and making sure that student borrowers submit a new promissory note.

"The process is very simple," Walter O'Neill, assistant vice president for financial aid at Roosevelt University in Chicago, said Thursday. "I can't even come up with an example of a hiccup."

Anthony Erwin, senior director for university financial aid and scholarships at Northeastern University in Boston, said that he had encountered "overly burdensome" rules and regulations in some past contacts with the federal government but that the university's move to direct lending in 2008 went off without a hitch -- "an absolutely different experience" [Nick Anderson, "Colleges scramble to adjust as student loan overhaul nears passage," Washington Post, 2010.03.26].

Additionally, Matthew Blake calls student loan reform, in theory, "unassailable."


  1. I support almost any program that will help more high school graduates attend higher education. It has a profound impact on their future income.

    Maybe I'm not seeing the big picture, but I compare the student loan program to the SBA loan program. Private banking handles the application and service work, and the government guarantees the underlying loan, which limits the bank's risk.

    If banks are taken out of the process there must be an expansion of government somewhere to handle the applications and service work that banks used to provide. Any talk of savings are eliminated when you add permanent government employees to an ever-ballooning tax-supported payroll.

  2. First and most importantly, Cory, I am not against grants for students to attend college. I never said that, and you know it.

    Secondly, I would like Congress to pass a bill on its own merits, not attached to a completely unrelated bill and snuck in that way.

    Cory, do you believe that every penny of profit the gov't takes in will go to student grants etc? Some will, and the balance into the general fund to help fund health care. That fact has been stated.

    If the gov't truly wanted to help students, then it would give students rates a fraction of a percentage over the gov'ts cost of borrowing. But it's not doing that. It's using the difference to help pay for health care.

    This school loans bill was attached as part of the health care bill to help cook the books to make the health care bill more palatable and good-looking to the CBO scorers.

    And as far as passing, it has also been stated that the student loan takeover would never have passed the senate, thus attaching it ensured its passage because of course the health care bribes and coercion and lies ensured its passage as long as the figures were "deficit neutral."!!!

    I have a problem with the gov't having the deciding power over who gets money, how much, what college they can attend, which colleges get subsidized more, etc.

    And BTW, the gov't is broke, don't ya know. Even the CBO erred in how much the deficit would be by a million dollars. Funny how that little tidbit didn't come out until a couple of days after health care passed.

    What's not to love? About this bill and this administration?? How long have you got.....

  3. Nonnie-

    The student loan reforms do not exclude the private sector. If they are willing to make student loans without government subsidies they still are able to do so.

    In the original system, the government sent money to private lenders, which then sent the money to students. Now, the money goes directly from the government to the students which will result in lower interest rate loans.

    Additionally, government backed students loans are non-profit. They are at cost. Private loans that were subsidized by the government were for profit.

    Now when you say:

    "I have a problem with the gov't having the deciding power over who gets money, how much, what college they can attend, which colleges get subsidized more, etc."

    I think you misunderstand how the original system worked. For government backed loans, the government already set the criteria, so this bill does not change that. Also, this bill will not change the way private loans work other than that they will no longer be government subsidized. So this bill isn't changing anything regarding your concerns.

    Also, when you say:

    "This school loans bill was attached as part of the health care bill to help cook the books to make the health care bill more palatable and good-looking to the CBO scorers."

    In point of fact, the government system is non-profit. The amount being put into the program isn't changing. This doesn't change how the healthcare bill was scored. Please, point to me any of the legislation which is now shifting the student loan program from non-profit to for profit.

    When you say:

    "If the gov't truly wanted to help students, then it would give students rates a fraction of a percentage over the gov'ts cost of borrowing. But it's not doing that. It's using the difference to help pay for health care."

    This is patently false. First, it's a non-profit program and provides the lowest possible rates that still allow it to break even. Secondly, if you're in support of providing lower interest loans to students, then you're in favor of this bill. The private lenders take the government money and then lend it out at a couple of points higher rate of interest. These direct loans will have lower interest rates than private loans from the original program.

  4. Rod-

    I believe you are misinformed about how the original program functioned. Private loan companies didn't vet the loans. The government did and did the paper work. Literally, the government did it all and then just handed it to the banks.

    The only reason the banks were involved because there was some risk when student loans could still be discharged through bankruptcy. Now, since you can't discharge the loans, there is no risk (or so little that it's silly to pain another group to take on that risk).

    So really, there is no need to have the private banks involved. Private student loan subsidization is literally a bank hand out. They do nothing and assume nearly zero risk.

    The new direct loan program will not require the expansion of the government at all because it was doing everything for the original program.

  5. Tony, thank you so much for knowing what the heck you are talking about.

  6. Tony: You're trying to tell me that the government already has enough people in place to physically handle the student loan applications that 15,000 banks are handling now? Wells Fargo, Citibank and so many others who have entire departments dedicated to selling and servicing student loans will see those departments shut down. Nonnie is right about where the profit/margin will go now. Instead of keeping people working in the private sector, we'll see further expansion of government, higher unemployment, a larger deficit and poorer service of student loans, and the profit margin of 2% or whatever it may be will support some other expansion of government. It is all about which philosophy you cling to. Bigger government or less government involvement. I fall to the latter.

  7. Yeah, nice post Tony. Thorough and informative. For the majority of people it clarifies things, but there is that segment that it won't matter if it was Dr. Knowlton making the post, they will reject it. As Rod said, they are gonna cling to what they want to believe. I wonder how they are handling that health report from Fox news that the self employed will like the bill. On one hand it's not what they want to believe, on the other it's what Fox News tells them they should think. What to do, what to do.

  8. Rod-

    If you're in favor of lesser government, you're in favor of this bill. In the original system, government was meddling by subsidizing some types of private loans. This obviously creates an uneven playing field.

    In the new system, the government will not subsidize any loans nor will it interfere with private banks providing loans to students. It will only offer direct loans to students through the government program. This will create a clear line between industry and government which will result in a level playing field.

    This change in no way hinders banks from providing student loans.

    With regards to your claims about the necessary expansion of the government to service these loans, in point of fact the government already does all of the qualifying and writing of the loans already. That is how the program worked in the past. Once all of the works was done, the loan was handed to a bank.

    Please feel free to refer to:


    about the student loan program. I skimmed it and believe that it's generally correct, though it's a wiki.

    Also, I do appreciate your point about government expansion. For many programs, the government utilizes the private sector to cut costs. However, that is not the case with the student loan program, so I see no reason to keep the private sector in the loop there.


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