Their View: Direct government lending needs expansion
Consolidate now. That's the short fix and the best advice for graduates who owe money on student loans. They need to lock in the lowest possible rates before July 1, when rates for the popular Stafford loan will jump to 6.54 percent.
The more complicated fix: The nation should re-examine its system for how students borrow money for college. The system wastes money, and the Office of Management and Budget has the numbers to prove it.
Student loans made through private lenders cost the federal government 10 times more than direct loans provided by the Education Department, an OMB report released last year found. Some students borrow directly from the government. More and more, however, they borrow guaranteed student loans through private lenders such as Sallie Mae. For every $100 spent on student loans, the government spent only 84 cents for direct loans, compared to about $12 for government-guaranteed loans from private lenders, the study found.
Clearly, going through a middleman costs taxpayers a lot more.
Best course of action: Expand direct government lending to students.
The government is already in the business of direct lending. And the government already assumes the risk of loan default for everyone with a student loan - whether that loan came directly from the feds or from a private lender.
When Congress created the loan program, lawmakers were afraid lenders wouldn't want to grant unsecured loans to young people. So they guaranteed repayment to lenders if students default. What a deal - for lenders. Collect interest, fees and penalties from borrowers. If the borrowers default on their loans, the government will pick up the cost. Little risk, big profit.
It's such a great deal, the last thing lenders want to see is more people borrowing directly from the government through direct-loan programs. So lenders did exactly what one would expect in responding to the OMB study - disputed the findings. Lenders argue that direct loans actually cost taxpayers more than private loans and that the OMB didn't figure in certain costs associated with student-loan programs, including administrative expenses.
The government does incur administrative costs by directly lending to students. But common sense dictates that directly loaning money to students costs less than funding a middleman. Especially when the middleman takes a chunk of the money earned on interest, is beholden to make a profit for its stockholders and is paying high CEO salaries.
According to the OMB, taxpayers could save billions if the government cut out the middleman private lender and expanded direct lending to students. That's money that could be used to make education more affordable.
- The Des Moines (Iowa) Register