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Government can be main student lender
Economics editor Chris Farrell
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TEXT OF INTERVIEW
Bill Radke: For college-bound students and parents, this is Fafsa time -- that's the Free Application for Federal Student Aid. In other words, the incredibly complicated form you have to fill out to get financial aid form the government. Marketplace's economics correspondent Chris Farrell joins us. Chris, President Obama says he want to overhaul the financial aid system -- he wants to cut out the banks. What is his plan?
Chris Farrell: Right, so we have this system, and it's called the Family Education Loan Program. And you can get your federally subsidized student loan through the banking industry. And remember, the government's underwriting the risk here, and the government's also paying the interest rate while you;re in college. And it's been about a $4 billion a year subsidy. But the government's had this program since the early years of the Clinton administration where you just borrow directly from the Department of Education. So you're not paying out any subsidy to private lenders, there's no extra $4 billion going out there. And what the Obama administration is saying is let's phase out the subsidies, save the taxpayers about $50 billion over the next decade, and we're going to have students take their federally subsidized loans directly from the Department of Education.
Radke: If the private system is so inefficient, Chris, why do we do it this way?
Farrell: It's this term called, this really ugly term: privatization. Privatization has kind of turned into this rigid ideology, and it's this notion that the private sector is always more efficient than government. Not necessarily true, and I think the student loan program is a classic example. There's every reason to believe that the private sector's made a nice little profit off the U.S. taxpayer for being less efficient.
Radke: So you're saying the last thing we need right now is helping out banks. What a crazy idea!
Farrell: Hahaha. Well, let's get banks back into the business of actually making loans and evaluating risk. And yes, I know -- at this particular point in time, it's probably a little bit strange or a little bit of a detour to be beating up on the government, the taxpayer, throwing extra money into the system. Nevertheless, we are going to come out of this, so let's set up a program now so that when it's time for students to borrow for college, they just do it from the Department of Education directly from the government. If we're going to subsidize it, let's do it that way.
Radke: Are you sure you want taxpayers to take on even more risky loans, Mr. Farrell?
Farrell: You know, the default rate is a little bit higher than the published default rate on student loans, and boy if we have another discussion, I think we've seen the bursting of a student loan-lending bubble as many other bubbles have burst. Students are still going to borrow. So, we're going to partially subsidize those loans, let's do it the most effcient way possible. I've never quite understood this notion of why reward inefficiency.
Radke: Marketplace economics correspondent Chris Farrell. Thank you.
Farrell: Thank you.
About the author
Christopher Farrell is economics editor of Marketplace Money, a nationally syndicated one-hour weekly personal finance show produced by American Public Media.
This story felt like propaganda, but it took me a while to realize why. The guest made the comment that the free market is not always more efficient than the government, as we can save the interest paid to banks if the government does it. However, then there was no comparison of the costs the government incures by managing the loans to the interest saved... Government comes with costs too, which are usually higher as there is little motive to be efficient.
Yeah, why is it that the gov is trying to put us all into more and more debt? If anything, they should being paying our tuition. Private student loans do not have the same protections as federal loans, and borrowers are not protected from private loans. They offer no or very few forbearance/deferment options, unfavorable repayment terms, high interest rates, and most of all they are not dischargable in bankruptcy. These are credit based loans, not backed by the federal government but are treated like back taxes and even child support. It is very sad to say that my own private loans with Sallie Mae and AES have ballooned to well over $250,000. I will never be able to repay these loans in my lifetime. The lenders will not work with me on new repayment plans and will not lower my interest rate. I am about to default on these loans, but then I have to worry about them freezing my checking account, garnishing my wages, or putting a lien on my house all without a court order because they classify themselves as federal loans when they are not. I know I am not the only one out there with loan amounts like this.
#1 - the government DOES NOT fully back private sector student loans...there is shared risks and costs.
#2 - the budget plan would add $1 trillion to the national debt and eliminate thousands of private sector jobs.
#3 - college costs is an issue that cannot be ignored.
#1 - the government DOES NOT fully back private sector student loans...there is shared risks and costs.
#2 - the budget plan would add $1 trillion to the national debt and eliminate thousands of private sector jobs.
#3 - college costs is an issue that cannot be ignored.
I don't know whether this is lead for information, or just another 'conservative' scare question.
"Radke: Are you sure you want taxpayers to take on even more risky loans, Mr. Farrell?"
The government already fully backs these loans. It's nearly impossible to get out or repayment, even in Bankruptcy. The IRS can automatically get the funds from Tax refund checks.
The 'loan' industry just does paperwork - for a substantial fee. There is NO risk for them.
As for one comment about the burden of FASFA - UGH! Dummy! Many of these loans already require FASFA, if you haven't already done one as part of your college application process.
Anyone who thinks that the public is better served by privatization is little not doing any more than following the blind conservative ideology.
The Best and Cheapest for the taxpayer and the public is to fill out the FASFA, and check the box for a federal loan!
The governments program is not cheaper nor is it more efficient. It is a low bid program with low bid service. Tearing down a program that has served millions of students for over 40 years is short sighted and reactionary. Do a little digging NPR and see what the real costs and benefits are with BOTH programs. I'm a liberal and even I don't believe this line!
I could hardly believe my ears! Let the government handle student lending because it will be more efficient? The student can look forward to starting the process by completing the "incredibly complicated" FAFSA form and then start wading through the same beaucracy that designed that form. Been to the Post Office recently, Chris?
