The Stylus

Republicans charge college loan program is government takeover

In March, President Obama signed into law legislation that ends government subsidies to private banks that have profited from making risk-free student loans. The provision was largely overshadowed by the battle over health care. The quiet but important debate that took place on student loans consisted of democrats offering the findings of both the Congressional Budget Office (CBO) and the Government Accountability Office (GAO) reports, while republicans relied on questionable statistics and general misinformation.

Sen. Lindsey Graham (R-SC) told Fox News on March 23, “$9.1 billion of money created by the student loan takeover by the federal government is going to pay for health care.” This claim is not true, but it is typical of the methods used by republicans to frame the discussion. The $9.1 billion is part of $138 billion in savings from the health care bill, which includes the student loan changes.

Currently, one-third of all government-backed student loans is made directly by the government; private lenders make the rest. Under the new legislation, all government-backed student loans will be direct loans.

The CBO estimates that the change will reduce government spending by $68 billion over 11 years. The savings will be used to increase funding for Pell Grants, invest money for community colleges and reduce the deficit. The law also makes it easier to repay loans, reducing the cap on repayments from 15 percent of workers’ income to 10 percent.

Conservatives have sought to portray the change as a government takeover, but it is unclear what a government takeover of an established government program really means.

Private business operations are often thought to be more efficient than the government, however in the case of student loans, the government has been shown to be more efficient. A 2005 report by the GAO found that subsidized loans by private lenders cost the government $9.20 for every $100 in loans, while the direct loans cost the government only $1.20 per every hundred.

Again speaking to Fox News, Graham said that as a result of the new law, “the average student will be spending $1,700 to $1,800 more during the life of [his or her] loan.” This is false: the reported dollars are based on the difference between current interest rates and those proposed by Graham’s colleague, Sen. Lamar Alexander (R-TN).

In reality, students will pay exactly the same rate under the new plan: 6.8 percent. Parents and graduate students who receive PLUS loans, which require a credit check and can be used to cover the entire cost of education, will see their rates lowered from 8.5 to 7.9 percent.

The republicans’ best argument against direct lending is that it will result in job losses. Alexander, one of the most outspoken critics of the plan, has repeatedly claimed that the change will put 31,000 Americans out of work.

Factcheck.org found the claim to be an exaggeration and cites an independent industry analyst that predicts the net loss will be less than 5,000 jobs. Alexander’s number is based on the assumption that every person who currently works in the industry will lose his or her job. Private companies that provided student loans will only lose part of their business: they will still service all student loans.

Sallie Mae, the largest private lender of student loans, states it may have to lay off a third of its 8,500 employees. Yet the lender also announced that they would bring thousands of jobs back to the United States from overseas to service the federal loans. Even if overstated, the potential for job losses is not welcome news given current economic conditions. However, the student loan program does not exist to provide jobs for banks.

Spending $68 billion to save 5,000 jobs is an incredible amount of money, especially when compared to the results of the money spent from the stimulus package. Mike Pickett, CEO of Onvia, a firm that tracks government contract spending, estimated “roughly $68 billion have actually reached contractors and subcontractors,” in his February interview with CNN about the stimulus package. “We estimate this has delivered . . . or saved about 500,000 jobs.”

Making the switch to direct loans will hurt banks that profited from government subsidies. But contrary to republican talking points, this change will benefit both students and taxpayers.

This is not just about taking money away from banks and giving it to students. It is about ending an unnecessary and wasteful subsidy to lenders, and helping the student recipients for whom the program was created.

Sean Joyce,  Stylus Correspondent

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