Federal student loan lending – a scheme that has already failed twice (Rep. Dan Burton)

My Democrat colleagues trumpet this accomplishment as a great boon to college students; they say that millions more of Americans will now be able to afford a college education. In reality, this change will not be good for parents, students, universities, or American taxpayers. Nor is it good for the 35,000 Americans who currently work in the private student lending industry. The SLM Corporation, also known as Sallie Mae, the largest student loan provider in the country, estimates that it will be forced to cut 2,500 of its 8,600 employees and downsize from 25 locations nationwide to about 5-7, because of lost business.  Access Group Inc., another student loan provider, has already cut 50 workers as the volume of new loans dropped and is trying to retain its 365 remaining employees by servicing old loans; although it is unclear if they can retain all of these positions.   

While that may not seem like a lot of jobs in comparison to the automotive industry, which employs hundreds of thousands of workers, with the National unemployment rate running at nearly 10%, should the Federal government really be enacting policies that kill American jobs? More importantly, should the Federal government be killing American jobs to enact a policy that has already failed when it was tried twice before?    

The Federal government first experimented with direct loans in the early 1970s through the Federally Insured Student Loan (FISL) program. FISL was so poorly managed – and because the government was so ineffective at collecting the loans, default rates soared to astronomical levels – the program was eventually phased out in 1976.   

The Clinton Administration resurrected the idea of Direct Lending (DL) in 1993 when it pushed through Congress the Federal Direct Student Loan program. Once again though, the Direct Lending program’s reputation became synonymous with slow, inefficient service. In response, Congress passed the “Higher Education Amendments of 1998” (P.L. 105-244) which specifically blocked the Clinton Administration from phasing out the private sector administered Federal Family Education Loan (FFEL) Program.

History has shown us that Federal programs tend to adopt a one-size-fits-all approach and are often stagnated by inefficiencies and capacity failures. The Federal government’s previous experiments with Direct Lending to college students seem to bear this out. If you think this time will be any different, consider the fact that the government’s Web site for handling student loans was broken most of Tuesday March 30th — the very day President Obama signed the law putting the government in charge of all subsidized student lending. Visitors to the site (www.studentloans.gov) early Tuesday afternoon saw an error message, while users Monday saw either an error message or, in the evening, were simply unable to connect to the site at all. This failure raises serious questions about how the Department of Education will manage to transition our Nation’s schools and millions of students to the government-run loan plan between now and July 1, when the loan changes take effect.

No one should really be surprised to see a massive government bureaucracy having technical difficulties.  No one should really be surprised either when the promised Billions in savings fail to materialize. The President and his supporters in Congress argue that having the federal government offer loans directly to students using Treasury capital will be cheaper for taxpayers; however, if history is our guide, there will be no real savings. Initially, the Congressional Budget Office (CBO) projected savings of about $94 Billion over ten years. That has since been adjusted downward significantly to about $62 to $40 Billion. What should concern all Americans is that the “Health Care and Education Reconciliation Act of 2010” contains about $40 Billion in new entitlement spending. In other words, any potential savings to the taxpayer from consolidation would actually be lost to new additional spending.   

Since 1965, competition and choice in student loan delivery and support have been hallmarks of the FFEL Program. In this country, it is the private market that drives competition, sparks innovation, produces cost savings, and is customer-focused. Private sector student loan providers have pioneered value-added services, such as financial literacy default prevention programs that the Direct Lending Program either cannot or is not able to provide. According to an Ipsos Public Affairs survey, over 90% of the respondents feel that they should have a choice in loan providers, and 60% think that private lenders would offer them better customer service than the government.   

Typically, the White House and Democrat Congressional Leadership refuse to listen to the American people and so for the moment at least, it looks like beginning on July 1, 2010, the government takeover of student lending will be realized.  

More Americans will be out of work and nothing will have been done to reign in the skyrocketing uncontrolled cost of college tuition which is the real problem our students face, not the modest fees the Federal government paid to lenders to process student loans.


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