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Debate: The Smart Reform for College Loans

Mar 12, 2010 – 6:12 AM
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Pat Garofalo

Special to AOL News
(March 12) -- This week, prospects for a much-needed reform that would make college more affordable for more students, while also ending senseless corporate welfare for student lenders, have been rising.

According to various reports, Democrats have been looking to include student loan reform in the reconciliation package that they plan to use to get health care reform across the finish line.

Under the bloated and inefficient current system, the government provides billions of dollars in subsidies to private lenders every year to originate student loans, while guaranteeing loan repayment of up to 97 percent -- a textbook example of socializing the risk while privatizing the profits. According to the latest data, for every $100 lent by the banks, the cost to the government is about $13.81 in subsidies and defaults; the same amount lent directly by the government costs $3.85.


Opposing View

From the beginning of the debate on comprehensive student loan reform, our position has been clear: We support it, says John F. Remondi of Sallie Mae.


Under a reformed system, instead of wasting these billions on subsidies, the government will originate loans itself and plow the savings back into education initiatives such as Pell Grants.

President Obama has made fixing the student loan process a top objective of his administration, and last year the House passed the Student Aid and Fiscal Responsibility Act (SAFRA). But like so many other bills, it has become lodged in the Senate. And the student lending industry (led by Sallie Mae) is spending millions to encourage lawmakers to kill it outright.

Among the bogus arguments against the reform:

It's a "Washington takeover" of student lending
. The fact is that the federal government already keeps the private student lending industry afloat. SAFRA would merely cut out the unnecessary middleman.

It's a job killer. Opponents claim that private lenders will be forced to shed employees when their business dries up. But while they would be removed from the origination business under SAFRA, private companies would still service the loans. In fact, as the Scranton Times-Tribune noted, Sallie Mae has already signed a contract with the federal government to service loans under SAFRA. In order to win that contract, Sallie Mae eliminated 2,000 jobs from overseas and brought them back to the U.S. If all the lenders follow suit, concerns about SAFRA's effect on employment will prove to be overblown.

In fact, by making college more affordable, loan reform will help fill in the shortage of 16 million college-educated workers that the economy will face by 2025.

Unfortunately, the millions spent on lobbying by opponents are working better than the facts. As Education Secretary Arne Duncan put it, the lenders are "a powerful lobbying force, and working-class families don't have lobbyists working for them."

In addition to lobbying, the lenders are, according to The New York Times, ginning up support by hosting "sit-downs with lawmakers, town-hall-style meetings and petition drives," aimed at the states where student lending has a large infrastructure presence, including Pennsylvania, Delaware and Nebraska. "We haven't left any stone unturned -- we'll meet with anyone who will meet us," said John Remondi, chief financial officer at Sallie Mae. "We're trying to identify at least 12 senators who would be helpful in this process."

Democratic leadership is reportedly concerned that including loan reform in a reconciliation package will scare off senators who would otherwise vote for the bill. That's unfortunate, since leaving it out would either force SAFRA to face the normal legislative process -- and an almost inevitable filibuster -- or push the bill off until after next year's budget resolution, when it can again be included in reconciliation instructions.

But with student debt at a record high of $23,200 per student, and the nation facing budget deficits for the next decade, there's really no justification for continuing to waste taxpayer dollars on lenders acting as unnecessary middlemen between students and their education.

This is a simple choice between prolonging a senseless subsidy and making college more accessible for more students.

Pat Garofalo is the economics researcher and blogger for at the Center for American Progress Action Fund. His work has also appeared in The Nation, The Guardian, the Washington Examiner and at New Deal 2.0.

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