Analogy Section: Private Lender is to Student Loan as Bicycle is to Fish

The student loan mess continues: last week, loan consolidator Sallie Mae fired its boss after he screwed up a takeover bid.  The company is blaming the collapse of the takeover on the Congress’s decision to reduce the subsidy banks receive for making student loans, though such a reduction was long overdue considering that the government is able to offer loans directly to students far less expensively than any private lender, no matter how subsidized.  (Sound familiar?  It should.  It’s the same situation we have in health care, where Medicare’s administrative costs are lower than those of any private insurer.  And which sector is inefficient?) 

As James Surowiecki explained in a New Yorker article in August, a combination of ideology ("Everything done by the government can be done better by the private sector!") and economic power ("Let’s pay off some college officials!") has kept the student loan industry in beer and skittles at the expense of the rest of us.

But truly revamping the student-loan program will required renewed confidence in the ability of government programs to serve individuals.  As it happens, there’s evidence for this in the history of student aid itself, which stretches back to the G.I. Bill, when the government committed itself to paying for the college education of returning veterans.  An overwhelming success, the bill involved no middleman: the government paid tuition fees directly to colleges. . . .Talk of the government running anything, of course, makes people anxious, conjuring up images of state-run steel factories, but the truth is that the government is already running the student-loan market.  The problem is that up to now it’s been run in the interest of student-loan companies.  Maybe it’s time to start running it in the interests of students.

On the horizon is a financial catastrophe in the student-loan market like the one now surfacing in the housing market.  If and when it occurs it won’t be because the Congress stepped in; it’ll be because it didn’t step in sooner.

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2 Responses to “Analogy Section: Private Lender is to Student Loan as Bicycle is to Fish”

  1. Assissotom Says:

    Keep up this great resource

  2. Fannie Says:

    Thank you for writing about this. The private student loan issue needs far more press than it currently gets in mainstream media. Even though the recent scandals brought some light to the issue, we need to address the root of the problem: College is too expensive for most people and there’s not enough non-loan student aid.

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