What these so-called “private” lenders – and banks, by the way, often do federally backed and truly private lending – argue in their defense is that they provide customer service of a quality the feds cannot, and that having both the FFELP and federal direct lending programs provides beneficial competition. I have seen little concrete evidence that these are truly major benefits, and the Obama administration is saying they’d keep private companies as servicers of loans to maintain quality customer service. Of course, this could very well be worse than the status quo: It will likely keep at least the biggest current lenders (read: Sallie Mae) at the political trough, but Washington will be THE lender for all students. Even with this in mind, though, at least in the short term you will likely see savings from going to all direct lending.

But the short term isn’t the main problem. Once most “private” lenders are out of the federal program, they will likely also get out of truly private lending, and the feds will do all they can to ensure that happens by increasing who is eligible for federal loans, how much they can borrow, and the generosity of the terms, crowding out what remains of truly private lending.

All of this in mind, ultimately the debate over whether you have guaranteed, direct, or both kinds of federal loans is a sideshow distracting people from the real problem: Federal student aid, no matter how delivered, drives up college prices. What is subsidized is consumed more, and when producers know you are getting a subsidy they can charge more without making you any less likely to consume their product. So yes, making all federal lending direct lending might save money, especially in the short run, but it does nothing to address the real problem – rampant price inflation – in higher education.