Under little notice to the average citizen, on Sept. 17 Congress voted along party lines to pass an administration-backed bill that abolishes risk-subsidies to banks for student loans, which makes the Department of Education a direct lender. While at first glance cutting out the middleman might seem like a positive thing, in the long run the real loser in this change is the student.
First and foremost, community banks never made much money off of student lending – it was seen as more of a “loss leader” to gain business from a future successful college graduate. The convenience of having a local bank helping a local student and their family was a service benefit and having a real person they could contact versus a far off government bureaucrat was also a positive.
Secondly, the banks were risk-subsidized by the government guaranteeing the loan for the student – otherwise “bailing out” the student NOT the bank and keeping the risks of student lending defaults low. As the Chicago Tribune puts it, “the House passed legislation that would make the biggest changes in federal student loans in decades, driving private banks out of the business and leaving it to an existing federal program to provide that crucial source of college financing.”
Future college students about to deal with the federal government to originate, manage, control and be the source of contact for their loans should be very, very afraid.
Why should students be afraid?
With the government now in full control of student loans, who is to say they can or can’t dictate the schools, majors or degrees the government will lend money for? Banks, by law and regulation, cannot discriminate against someone they are lending money to but through entitlements, demographics, lack of competition and just plain power, the federal government sure can.
Finally and most importantly, the devil is in the details of how the new federal government’s direct lender will operate. What should have student borrowers angry is that federal government student loan rates are currently locked in at a whopping 6.8 percent when 5-year Treasury rates are around historic lows of less than 2.5 percent. It’s ironic that students making little or no money are being charged the highest interest rates from the same entity (the federal government) that used to subsidize the very risk of them paying it back. Maybe our government figures it’s cheaper to fleece our students than to borrow more money from China.
As private student lending company Edamerica’s president recently wrote, “Under the student loan reform legislation, the federal government will turn a profit and spend that money and more on entitlement funding. In the end, 100 percent of student borrowers will pay artificially inflated interest rates, but fewer than 30 percent will receive Pell Grants. Students will be overcharged for their education loans to subsidize entitlement programs.
“Contrary to public perception, banks do not set student loan interest rates. The government establishes the rates at which students borrow under the Federal Family Education Loan Program. The current interest rate of 6.8 percent for unsubsidized Stafford loans is well above market interest rates and creates an unnecessary repayment burden for students (and their families) already reeling from debt in an unstable economy. The rates are even higher for parents and graduate students, now borrowing at 8.5 percent. Consider that graduate students are ineligible for Pell Grants, and this interest rate seems especially unjust.”
As an adjunct instructor at ICC, former Ole Miss teacher and parent who cares greatly about the education of our region, it is with regret and sadness that my full time employer, a regional community bank, is being forced to join many other local, regional and national financial institutions this week in ending the practice of making student loans. Again, it was a local service – not a profit center.
Now that the federal government will have full control and no competition within student loans – one wonders how long it will be until we see the federal government choosing the courses for our students, the careers they can major in, the schools they can attend and who may receive loan funding for higher education. Big government just got a little bigger.
John Oxford is a community columnist who resides in Tupelo. Contact him at firstname.lastname@example.org.