Commentary: Government shouldn’t be in business of making student loans

By Richard D. George

Would you prefer the federal government issue all mortgages? How about credit cards? Auto loans? Amazingly, Rep. Tom Petri, R-Fond du Lac, and others in Congress want the federal government to make all the country’s student loans.

Two programs compete at present: the Federal Family Education Loan Program (FFELP), where private sector lenders make the loans, and the Federal Direct Student Loan Program (FDSLP), where the federal government makes the loans.

The FFELP has served as a highly successful public-private partnership for over 40 years. But this summer’s student loan “scandal” — a few bad apples in a large barrel — has given some the cover story they need to drag out an old proposal and suggest big government is the solution to a poorly defined problem.

Rep. Petri is a major supporter of a bill that would calculate theoretical future savings and pay colleges real current dollars to abandon the FFELP and join the FDSLP. The idea seems simple. The federal government can borrow money more cheaply, and should eliminate the middleman by issuing the loans directly. Elegant on paper, but a disaster in reality. After over a decade of operation the FDSLP’s balance sheet is $16.2 billion in the red. Further, some 600 colleges have pulled out of the FDSLP in recent years.

Borrowers under the FFELP program benefit from the competition between banks and other private sector lenders. The competition drives borrower interest rates down and service quality up. Under the FDSLP, rates are set by law — and if the cost of borrowing goes up, the federal government loses even more money.

Here’s another secret Rep. Petri and others don’t disclose. If a school elects to participate in the FDSLP, its students cannot get a federally sponsored loan under the FFELP. Its students cannot benefit from FFELP loans that could cost borrowers hundreds, perhaps thousands of dollars less over their life, depending upon the amount borrowed. Choice and competition are critical to low cost and high service quality. Government monopolies deliver neither.

Legislation pending before Congress right now would eliminate some $18 billion of FFELP program costs — much of it in the form of lender revenues that currently support borrower rate and fee reductions. This is over and above the same amount extracted some 18 months ago.

And the version of legislation before the House of Representatives right now would spend about one-third of the savings on increased grant funds, one-third to reduce the interest rates on some student loans, and one third on entirely new entitlement programs, which will require additional funding in future years.

More grant funding is good. Reduced interest rates sound good — until you consider: 1) they reduce the interest rates for those who have already completed their schooling, not the students who need financial aid to attend college in the first place; and 2) reducing revenue below the cost of borrowing creates more red ink that taxpayers will need to cover. And do we need new entitlement programs, or should we support those we already have?

The federal government should limit its activities to areas where it can’t leverage the private sector’s financial and operational resources. Its time and effort would be better spent adding clarity to FFELP program regulations, rather than trying to build walls around a non-competitive FDSLP program.

Those walls have a history of collapsing, and without a healthy FFELP program, there will be no back-up plan to deliver funds to students and parents as they seek to finance perhaps the most valuable asset they’ll ever acquire — a post-secondary education.

And along the way, schools who have elected to participate in the FDSLP program should be required to process loan applications from students and parents who wish to borrow from a FFELP lender, perhaps their home-town bank.

Richard D. George is president and chief executive officer of Great Lakes Higher Education of Madison. Great Lakes is a non-profit corporation that assists schools and lenders in providing financial aid to students.