Direct student loans only, please

Commentator Robert Reich

TEXT OF STORY

SCOTT JAGOW: The New York Attorney General says he may file criminal charges in the student loan scandal. The allegations are that some lenders have been paying school loan officers if they steer students to their loan company and a Department of Education official has been put on leave. Turns out he owned stock in one of these lending companies. Commentator Robert Reich believes the whole system of student loans needs an overhaul.


ROBERT REICH: The federal government subsidizes college loans in two different ways, giving colleges and universities the option of which way to go.

The first way is for the federal government to lend students the money directly. Students get a good deal because the government, being the government, can raise funds at a lower interest rate than banks or other private lenders.

The alternative is for the federal government to subsidize student loans indirectly by guaranteeing banks and other private lenders that if a student doesn't repay the loan, the government will. The government also gives banks and private lenders additional subsidies to ensure they get a profitable return on any student loan they make.

Obviously, this second alternative is a great deal for the banks and other lenders. Hey, a guaranteed return on a no-risk loan?

But it's a lousy deal for American taxpayers. According to a study by the Center for American Progress, taxpayers pay about $7 more for every $100 lent by the private lenders than they do on direct government loans.

That amounts to billions of taxpayer dollars each year. Billions that could be saved if the direct loan program was the only program. Billions of savings that could be put, for example, into Pell Grants for needy students.

So here's the multibillion-dollar question: Why does the federal government continue to provide colleges and universities the option of going with a more expensive program when the government can offer direct loans more cheaply?

Why is it that some 15 years after the direct student loan program was first established, more than three-quarters of student loans still come through the more expensive system?

Let me hazard a guess. The banks and other private lenders have enormous political clout in Washington. They also have clout within colleges and universities.

This is the real scandal of student loans, and it's got to stop. There's no good reason for the federal government to waste taxpayer money by subsidizing banks and other private lenders when government direct loans are cheaper.

JAGOW: Robert Reich teaches public policy at the University of California Berkley. He was Labor Secretary under President Clinton.

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