Government takeover of student loans?

A graduation cap with money symbolizes student loans

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TESS VIGELAND: For most high school seniors, the hard work of getting into college is done. Applications and essays are in the mail. Now...they wait. And they worry, not just about getting in, but about how they're going to pay for it if they do.

The Project on Student Debt said this week that graduates owe an average of more than $23,000 when they leave school. With so many students taking on bigger loans, you might think lenders would be begging for their business. But Bank of America just joined a growing list of financial firms no longer accepting student loan applications.

Our senior business correspondent Bob Moon tells us banks are leaving the business to their rich uncle.


Bob Moon: If you've borrowed money for college from a bank or other financial institution lately, you can almost certainly thank Uncle Sam. The government has had to fill the gap as private funding has dried up. Now, the Obama administration wants to eliminate the cost of the middleman and make loans directly.

Scott Peterson is a grad student at Dominican University outside Chicago. And he says he'd welcome doing business directly with the government, since he's never understood the way things work now.

Scott Peterson: Well, it just doesn't make that much sense to me, basically. I mean, I'm getting federal money to help me go to school, but a private firm is basically just taking money from the government with one hand and giving it to me with the other.

Federal officials say they want to streamline a confusing bureaucracy. Bob Shireman is deputy undersecretary of education. He says the government should handle the application process and make loans borrowers can count on.

Bob Shireman: We need to be able to tell families and students that their loans are going to be there, and moving in this direction allows us to confidently say that families will have access to loans.

But the plan is facing fierce opposition from free market proponents. Take this jab posted on YouTube by the Competitive Enterprise Institute

Video by the Competitive Enterprise Institute: We at the federal government are proposing an entire takeover of the student loan industry. The Student Aid and Fiscal Responsibility Act of 2009 would give us the power to decide your educational future. Please give us the power, because we're the federal government, and we should control everything.

The direct loan idea has already passed the House and is nearing a Senate vote, likely by next month. And with the writing on the wall, some financial institutions are already abandoning the student loan business. Lately, a few panicked listeners have written in, wondering if they'll be able to get loans for college in the meantime.

Kevin Bruns heads the industry group America's Student Loan Providers. He says there's still plenty of student loan money and lots of ready lenders.

Kevin Bruns: There has not been a single student in this country that has not been able to get a guaranteed student loan throughout this credit crisis.

His group warns that thousands of financial jobs are threatened by the federal student loan takeover. But the Education Department's Bob Shireman says private enterprise would still get a piece of the pie.

Shireman: We make the loan directly, and then contract with the private companies to do the collection on these loans. So it's really moving from a government loan program to a government loan program, but run in a different kind of way.

The kind of way that the loan industry's Kevin Bruns says would kill healthy competition among private lenders.

Bruns: If there's no longer any incentive at the retail level to do a good job and to invest in making this process more convenient, what will happen to the service levels? Where will I go then? Well, you won't have anywhere to go.

The government already has a limited direct-lending option. Education Secretary Arne Duncan bragged about it to financial aid officers in Nashville this week.

Arne Duncan: We had independent surveys, customer satisfaction surveys, and they found that service in the direct loan program is comparable to or better than that coming from the financial services companies.

Whatever Congress decides, the government and industry leaders we spoke to say lawmakers won't leave students in the lurch. And one financial aid counselor told me borrowers shouldn't notice much change, because whether it's a public or private loan, the money's still green.

I'm Bob Moon for Marketplace Money.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.

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