The federal guaranteed lending program – formally known as the Federal Family Education Loan Program (FFELP) – is in large part just welfare for “private” banks that provide loans with almost no risk because the Feds protect them almost entirely against default and pay them various fees.
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.
5 responses so far
1 barker13 // May 7, 2009 at 11:15 am
“The federal guaranteed lending program formally known as the Federal Family Education Loan Program (FFELP) – is in large part just welfare for “private” banks that provide loans with almost no risk because the Feds protect them almost entirely against default and pay them various fees.”
OK. I’m with you so far. Sounds like a bad deal for taxpayers.
“…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)…”
(*SHUDDER*)
My God… it’s a never ending nightmare, isn’t it?
“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…”
Stop.
STOP!!!
Stop… stop… STOP…!!!
Oh, my frigg’n God… they’re destroying my country!
That’s what you’re telling me, right Neil?! You’re telling me that the same basic reasoning and policies which led to disaster in the housing debacle are the Democrat’s newest policy proposal for funding higher education.
(*SIGH*)
“Federal student aid, no matter how delivered, drives up college prices.”
BINGO…!!! Buy this man a beer!
“What is subsidized is consumed more…”
Yep. (*SIGH*) Plus… “subsidization” is simply taking the money out of different pockets. The more debt government racks up, the more liabilities to taxpayers now and in the future.
(What’s that phrase…? “Pay me now or pay me later?”)
(*SNORT*)
“…the real problem – rampant price inflation – in higher education.”
Well… sure that’s one problem… but the main problem is that for the most part “higher education” is an artificial concept which serves as a major misallocation of time, effort, and funding.
You’re read Murray’s “Real Education” I assume…???
Murray hits the nail on the head.
If by chance you haven’t read Murray’s “Real Education”… run to the nearest bookstore or library and get it right now! Read it. Get back to “us” in a subsequent post after you read it.
(*WINK*)
BILL
2 ottovbvs // May 7, 2009 at 1:45 pm
barker13
11:15 AM
Today Pell grants…..tomorrow communism…..he apparently doesn’t know that 80% of iffy mortgage lending came from the private sector…… Neal’s basic premise is correct. Private lending is a bit of corporate welfare. These loans are largely risk free and are subsidized by the federal govt ie. taxpayers…… Barker has no problem subsidizing private lenders it’s just providing more and cheaper loans for students and ordinary American parents he has a problem with. Obama’s aim is to transfer the savings from eliminating private subsidies to expanding the student loan program and reduce it’s cost. What not to like about that. Quite a lot apparently according to Barker who thinks higher education:
“is an artificial concept which serves as a major misallocation of time, effort, and funding”
…..Alriiiiiight
…..Neal’s also correct about the H/E inflation.
3 midcon // May 8, 2009 at 5:35 am
Higher education cost too much. But I wonder if it isn’t just an economic issue. Supply is supposed to increase to achieve equilibrium with demand. Which it has if you look at the explosiion of things like distance learning. But “easy” money drives up the price up the goods.
An educated America is a stronger America, so the government supports access to education. But the price is continues to increase becasue of the easy money. It is the standard economic model at work with money being the supply and cost standing in for demand. Notice how when you get an increase in income how easy it is for costs (spending) to rise in order to meet your increased supply?
Some consideration must be given to controlling the cost without compromising the quality of education. Until then, costs will continue to increase to meet the supply of money.
4 Bulldoglover100 // May 8, 2009 at 5:48 am
I support federal student loans. I always have and always will. If we do not educate our children they grow up to be Sarah Palins, heaven forbid, and as the last 20 years have shown many other countries have passed our grand nation by in this area because they do support educating everyone who wants an education.
We support education up to grand 12 and then my party wants to leave them hanging…where in the world would that make good sense???
5 barker13 // May 8, 2009 at 11:20 am
Midcon:
You really should read Charles Murray’s “Real Education.”
BILL
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