Why Student Loan Reform is Essential

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The House of Representatives voted today to pass a bill that effectively kills private lenders in the student loan market. That might sound terribly disruptive, but most of these student loans have always been backed by the government in the case of default and so the House essentially voted to cut out the middleman -- banks who were profiting from zero-risk student loans. This law is without question good for the the federal government, which stands to save $87 billion in the next ten years, and for low-income students who will likely reap the dividends.


The Wall Street Journal reports that all for-profit lenders

who currently account for 80% of the government-backed loans made each year, would be cut out of the market for originating loans ...

The Obama administration would use anticipated savings from the measure to increase grants for low-income students, boost funding for minority student groups, provide money for school construction with a small portion left over to pay down the deficit.

Today about 75 percent of loans are federally subsidized, risk-free loans carried about private lenders through the Federal Family Education Loan Program. You will not find a single person in the world who believes that direct lending -- from the government to the student -- is significantly cheaper than the FFEL program. Tens of billions of dollars will be cut from useless middleman processing and used instead to fund college educations for low-income students. A shot at upward mobility grows from the ashes of superfluous banking.

But how will the bill fare in the Senate? Eliza Krigman of National Journal says the Democrats will try to use reconciliation -- a budget procedure that allows some bills to be passed with a simple 51 vote majority rather than find 60 votes to break a filibuster. That makes its passage seem more likely, but banks will unquestionably exert pressure on key Democrats -- like Ben Nelson of Nebraska, whose state is home to a major student lender -- to fight the bill.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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