Federal Control of Student Loans Unwise

Leaders in the U.S. House, looking for ways to smooth the passage of controversial health coverage reform, have added an overhaul of the federal student loan process to the package. Under the proposal, private lenders would be cut out of originating subsidized student loans.

In practice, this means they would be cut out of offering student loans entirely, because regulations adopted in 2008 make it difficult for lending institutions to make college loans that aren't federally backed.

The argument made by supporters of the proposal is that since the government backs the loans, it makes more sense for it to extend the loans directly rather than through banks and thrifts, which receive a federal subsidy for doing so and are protected from loss by the federal government.

But a quick look at the default debacle in the federal government's home loans extended through Fannie Mae and Freddy Mac, which required federal bailouts when the housing bubble burst, should raise questions about the federal government's ability to originate and service loans on its own.

It is unlikely that the federal government will do better than private lenders in limiting default rates when it is handling all of the loans itself, or extending them through college loan offices.

If the subsidy for private lenders is too great, reduce it.

And allow private lenders to make college loans that aren't guaranteed by the federal government. The banks could then compete with the federal government on customer convenience and assume their own risks in possible defaults, which would be an incentive to be careful in managing the loans.

This ought to be the shape of the debate. But 35 members of the House who voted for the college loan overhaul also voted against the House health reform package — and House leaders are trolling for their votes.

This is the wrong way to deal with either the health or college loan proposals.

REPRINTED FROM THE DETROIT NEWS

DISTRIBUTED BY CREATORS.COM