3 Cheers for the New Student Lending Law

By Derek Thompson

Today President Obama will sign a bill that overhauls the student loan industry. For decades, the federal government has supported student lenders by backing loans originated by private banks. Today we take back the bank subsidy and use it to spend down the deficit and pay low-income kids to finish college. Good day.

Our byzantine student lending system is essentially the product of two competing principles: managed affordability and capitalism. The government guarantees the loans because otherwise private banks wouldn't make low-rate loans to an 18-year old kid with no earnings, no credit history, and zero collateral when he won't start paying interest in four years. So the banks get the interest and the government gets stuck with 97% of the losses if the student defaults. Heads, students pay the bank. Tails, taxpayers pay the bank.

But the government has been loath to take over the industry itself -- even if it means leaving tens of billions of dollars on the table -- because reasonable efforts to simplify the system are met with hysterical screaming about socialism from former Education secretaries who should really know better.

Effective today, student lending will be a government-run program. What does that mean for borrowing students? Not a whole lot, as I understand it. They will fill out the same paperwork and pay similar interest rates. They'll even see annual payments capped at 10 percent of current income. The only difference is that their interest -- roughly $7 billion a year for the next decade -- will go to the feds instead of the banks. The government plans to set some of that money aside for deficit reduction, inject billions into Pell grants for low-income students and channel some of it into education initiatives like community college support.

The opponents from the private student lending industry are right: they will lose some jobs. But not all jobs. Private lenders will still complete paperwork and administer the loans. All things equal, I'd prefer this policy go into effect when unemployment wasn't clinging to double digits. But I support the change wholeheartedly. And as the New America Foundation's Jason Delisle told me, these private lenders don't particularly deserve my tears: "under the pretext of competition and choice and the private sector is a smokescreen for banks who want to highjack this federal student loan program and sell kids credit card like loans when they're least likely to know what they're getting into. Really, these are the jobs we want to protect?"

This article available online at:

http://www.theatlantic.com/business/archive/2010/03/3-cheers-for-the-new-student-lending-law/38188/