Windfall for banks may be withdrawn to aid Pell students

Billions in profits are being made annually on government-subsidized student loans by banks. The Obama administration wants to make direct loans to students and cut out the banks. Here’s why:
The way the system works banks make the loans, but the government guarantees them up to 97 percent. To say it another way, the banks make the money and the taxpayers take almost all of the risk.
A key part of President Obama’s educational re-form plan is to cut out the middle man and use the profits made on the loans to expand the program and make a college education possible for more low-income students.
The student loan industry thinks this is a horrible idea. They argue that the banks provide important services to justify the huge profits they make from the program: marketing, customer relations, billing, default prevention and collection of delinquent loans. They also complain that taking banks out of the student loan picture would be a huge expansion of government into the private sphere.
For example, Rep. Howard P. McKeon of California, the senior Republican on the education committee, said Democrats should not cut out lenders. “A government-run, one-size-fits-all program is not the answer,” he told a New York Times reporter.
That’s pretty standard rhetoric that doesn’t stand up to examination. The student loan program is already one-sized by Congress, which sets the interest rate and provides the subsidies that guarantee lenders a handsome profit with near-zero risk. The bankers don’t want anything to do with a student loan program without subsidies. We’re not talking free enterprise vs. socialism.
Moreover, in the current credit crisis, student loans are now being financed directly or indirectly with federal, not private, dollars.

THE BOTTOM line is that taxpayers take the risk and should also make the profit. It only makes sense to cut out the middle man (the banks) and use the profit made on the loans to expand the Pell Grant program.
The downside is that expanding the already large direct loan system the government now operates would result in job losses for the banks that have student loan departments. Those losses would be offset in the years ahead by the good jobs Pell Grant recipients would garner once they won their degrees.
The case for reform is made stronger by the fact that Sallie Mae, the nation’s largest student lender, paid its chief executive $4.6 million in cash and stock and its vice chairman more than $13.2 million in cash and stock last year — despite the fact that it lost $213 million.
A healthy chunk of those outrageously large pay checks came from student loans guaranteed by U.S. taxpayers. President Obama is making the argument that it would serve the nation better to spend those millions assuring a good education to low-income students who otherwise could not afford to equip themselves for good ca-reers.
Sounds like a good trade.

— Emerson Lynn, jr.