The Obama administration is attempting to get private banks out of the student loan business. How much will this really save the government? Liberals like Matt think quite a lot. I'm skeptical.
It's not that I particularly care whether the government guarantees the loans, or makes them directly. Frankly, I think the whole idea of government sponsored student loans, and possibly even grants, is iffy, and suspect it's done little more than inflate tuition costs. But I don't see any a priori reason to believe that the private sector is doing a bang-up job.
That said, the government is not a bank. Originating loans is not merely a problem of issuing some t-bills and funneling the proceeds to students; it requires a fairly large administrative apparatus to manage the applications, disburse the money, track the funds, oversee repayments, provide customer service to borrowers, adjudicate requests for forebearance, collect bad debts, close out the loans and accurately forecast the need for all of the above. That's why government loan programs, from VA loans to SBA assistance to student loans, has traditionally been handled by banks rather than directly through the government.
I'm not predicting that it will be a debacle, although it could be--it's a lot harder than it sounds to start up a bank, which is why it doesn't happen that often. But I suspect that we'll find that the money the banks skimmed off goes to pay our own staff. Banking operations have scale and synergy; the government programs free ride on competencies developed to service other loan areas. Reinventing the wheel rarely proves as lucrative as it looks.
Update: Yes, I'm aware the government makes direct loans. I'm sure it's lovely. I just don't think it will be particularly cheap to go from servicing a few big schools to a zillion little ones.