Government Takeover: The Student Loan Industry

Last week the US House voted to prohibit private lenders from issuing government backed loans. The bill amounts to a government takeover of the student loan industry complete with almost every bad policy idea in higher education, including; increased subsidies for Pell Grants, new green-school mandates, prevailing wage requirements and new grants for community colleges.

Originally the Congressional Budget Office estimated ending loan subsidies and turning control over to the government would save taxpayers an estimated $87 billion. However, the CBO also said that when administrative costs and market conditions are considered the savings could be much lower. In fact, the CBO’s Director estimates a $49.9 million cost to taxpayers over 10 years. And Cato points out that if the bill passes the senate taxpayers will be on the hook if students defalut on loans.

The bill’s sponsor, California Rep. George Miller defended the Student Aid and Fiscal Responsibility Act by saying, “The choice before us is clear. We can either keep sending these subsidies to banks or we can start sending them directly to students.” While that sounds nice that’s not what this bill will do. Apart from administration costs the money would be spent on things that don’t help pay for college, such as construction at K-12 schools and new preschool programs.

But most importantly increasing Pell grants and reorganizing the loan industry will do nothing to lower tuition fees and cost roughly 30,000 jobs at private lending companies.