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March 12 2010

Government-Run Student-Loan Scheme a Higher Edu-bacle

Vicki E. Alger

It seems health care isn't enough-now the feds want to taker over college loans. U.S. Education Secretary Arne Duncan blasted banks last month for making profits on student loan interest. Secretary Duncan says his department is the better education investment vehicle. More like Department of Motor Vehicles, says Sen. Lamar Alexander (R-TN), a former U.S. education secretary and former president of the University of Tennessee.

"Here is what they haven't told us," says Sen. Alexander. "The Education Department will borrow money at 2.8 percent from the Treasury, lend it to you at 6.8 percent and spend the difference on new programs. So you'll work longer to pay off your student loan to help pay for someone else's education -- and to help your U.S. representative's reelection." But what about Secretary Duncan's concern that college students graduate with debt averaging more than $20,000? Sen. Alexander does the math.

Typically students have an "average loan debt of $24,651. Assuming a standard 10-year repayment at 6.8 percent, those students would pay roughly $9,400 in interest. If we really want to save students money, why not just reduce the interest rate by 1.5 percentage points, to 5.3 percent, saving students $2,240 in interest?" Sen. Alexander explains that roughly 2,000 lenders offer government-backed student loans on more than 4,000 campuses. If students are smart enough to go to college, shouldn't they be smart enough to pick the lender they prefer?

Apparently not. Secretary Duncan says it's time to shift to "direct lending"and end "wasteful subsidies to banks." But how is ED, a government bureaucracy, better situated to be a lender-much less one that's not wasteful-since it exists on subsidies, too?

A better approach would be to let parents and students put aside as much as they can into tax-exempt college savings accounts at banks that offer the most competitive rates. Keeping more of their money would also get to the source of wasteful subsidies, namely government. Let other family members and even employers make tax-deductible contributions to those accounts as well. Meanwhile, cut the ED bureaucracy and redirect funds into college grants for students based on financial need. Make postsecondary institutions' federal funding contingent upon matching those federal grants by streamlining their own administration and cutting costs.

Such an approach would expand students' and their families' options for financing higher education, while helping shrink government back to its proper scope.

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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