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Take the Banks Out of Student Loans

Take the Banks Out of Student Loans

The Roanoke Times

September 21, 2009

Sep. 21—The U.S. House of Representatives last week passed legislation to overhaul the federal student loan program. Students would borrow money from the federal government instead of banks, saving taxpayers billions of dollars a year.

Education is the cornerstone of democracy, an informed electorate and all that.

It’s good for the economy, too. Colleges and universities prepare students for the entry-level jobs as engineers, doctors, scientists and artists that America needs to compete in the global marketplace.

Uncounted professionals today owe their success to the federal loan program. As the price tag for a degree rose faster than average incomes and general inflation, federal assistance bridged the gap.

The way it works now, students apply for loans that are awarded most often by banks. The federal government then subsidizes and guarantees those loans.

For the banks, it’s a sweet deal. When students default on their loans, the government covers the losses.

Banks also build relationships with potential lifelong customers who will have healthy incomes. The banks take on minimal risk and enjoy tremendous returns.

Some banks got greedy, though. In recent years, they abused the system and paid off college officials for access to students.

The House, with backing from President Obama, has had enough. Under its bill, the government would become the lender. That would free students from the vagaries and abuses of bank loans.

It also would prevent interest rates from automatically jumping from 3.4 percent to 6.8 percent in 2012. Instead, loans would have a variable rate linked to U.S. Treasury bills that could not exceed 6.8 percent.

Cutting out the middleman would save money, too. The nonpartisan Congressional Budget Office calculates $87 billion over 10 years.

Some of that money would go to education programs that sorely need additional funding, including offering better loans to low-income students.

The challenge now is in the Senate where the bill is expected to face stronger opposition, including from some Democrats.

Americans will soon see if their senators care more about helping students afford a college education or padding bankers’ pockets with tax dollars.

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