As part of its one hundred-hour legislative agenda, the newly elected Democratic majority aims to make college education more affordable. Next week, Congress is expected to pass a bill that cuts interest rates on federal student loans in half, a move that would shave about $4,400 from the $17,500 of debt that the average student graduates with. In the future, the Dems want to increase the maximum Pell Grant to $5,100 a year. While important moves, they should only be the beginning of an expansion of access to higher education. The federal government should manage student loans itself instead of using taxpayer money to hire lending companies.
In the American economy, expanding college education is one of the most important methods of ending poverty and reducing inequality. Those with a college degree earn 80 percent more than those with no more than a high school diploma. Although America has traditionally been touted as the land of equal opportunity, rising tuition and cuts in student aid threaten to deny the poor a fair shot at achieving social mobility. While 82 percent of those in the top quartile of income have a bachelors degree by the age of 24, only 12 percent of the bottom half do.
Today, the federal government doles out loans indirectly, hiring lending companies—the biggest one being Sallie Mae—to manage the Federal Family Education Loan Program. The government should cut out these middlemen and make direct loans to students. Sallie Mae makes windfall profits, about a 37 percent return on revenues. These profits are high because the government insures Sallie Mae against risk by guaranteeing it a certain return on their loans and compensating them for defaulted ones. By switching completely to direct lending, the government would save $4.5 billion annually, enough to fund the Democrats’ interest rate cut or 1.5 million Pell Grants. Though the government would have to create more bureaucracy for this, this seems to be a unique case where doing so will actually save money. And the government could merely expand on the small direct lending program they currently run. (Tramadol)
Georgetown and other colleges currently have a choice between direct lending and the FFELP. However, the lending companies give colleges incentives to choose the FFELP, so 77 percent of colleges, including Georgetown, choose the lenders.
Taxpayer dollars are padding corporate profits instead of helping needy students reduce their debt. With a tight federal budget and without increasing taxes, it will be difficult to find a lot of money for college education funding. Here’s a solution: cut out the middleman.
