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The Honolulu Advertiser
Posted on: Monday, September 28, 2009

Eliminate middlemen from student loans

By Molly M. Claflin

Congress is considering what may be one of its most important pieces of legislation this year: whether to take the student loan program away from private banks and shift it to an existing government program. The House passed the bill last week; the Senate could take it up as early as this week. It's the first step toward reforming how students pay for college. And in this troubled economy, students are the best investment the government can make.

Two-thirds of today's college students rely on loans to fund their education, according to the Department of Education. As the cost of college rises and interest rates creep up, everyone has suffered.

Everyone but the lenders.

The lenders are large for-profit companies that, under the current system, act as middlemen for student loans. But the government provides the money and assumes all the risk by guaranteeing the loans; the lenders broker the deal and make all the profit. The largest student lender, Sallie Mae, boasted an astounding 1,900 percent return on its stock between 1995 and 2005 and paid its executives hundreds of millions in bonuses.

Currently, students can get low-interest loans from a federal program or from a bank. The proposal in Congress would take the program out of the hands of for-profit lenders.

The Congressional Budget Office estimates that the plan would save the government $87 billion in subsidies over the next decade. Just think of what $87 billion could do, if reinvested in students. The proposal would also block a scheduled increase in the loan rates to 6.8 percent in 2012 from 3.4 percent in 2011. The bill would allocate $40 billion of the money saved to government Pell Grants, which benefit low-income students. The maximum annual grant would go up to $6,900 by 2019 from $5,450 in 2010.

Take away the subsidies to the for-profit lenders and their profit margins and it will mean more money available for students. Then maybe more of us could answer President Obama's call to service; to skip the private sector and instead focus on serving our communities often the reason many of us went to college in the first place.

Reforming the student loan system creates a snowball effect. By helping finance a student's education, the government helps that student embark on a successful career. And long term, it will build a nation of educated, career-minded and socially minded citizens who can help create a better future while paying into Social Security and the tax system.

Student loans shouldn't be a Wall Street business venture. They represent the struggles and dreams of families to help the next generation succeed.

Molly M. Claflin is a recent graduate of Stanford Law School. She wrote this commentary for the Los Angeles Times.