President Obama wants to end federal subsidies for a student loan program that's unnecessarily expensive but actually works pretty well in Alaska. The challenge for Congress is to fix the problems with the way the Federal Family Education Loan Program works in the Lower 49, while keeping helpful education aid available to Alaska borrowers. In this privately run program, lenders make loans using their own money, at an interest rate set by the federal government, which guarantees repayment if students default. To keep the interest rate relatively low, the federal government pays private lenders generous subsidies. But lenders collect the subsidies, regardless of how risky an individual loan is. Lenders get to keep all the profits from making these no-lose loans, while the federal government bears all the risks of default.
No surprise then, that private student loans have become a hugely profitable business.
Sallie Mae, a leader in the industry, is a multi-billion- dollar corporation that spends large sums on lobbying Congress.
The lucrative trade in federally guaranteed student loans has produced some seedy practices. New York State caught several lenders dishing out favors and paying kickbacks to colleges that steered student loan business their way.
Subsidizing those private loans costs the federal government a lot more than a federal loan program that makes loans directly to students. In 2006, the Bush administration noted that underwriting a private student loan cost three times as much as the same loan made directly by the federal government. The excess cost runs about $10 billion a year, according to an estimate from the nonpartisan Congressional Budget Office.
President Obama's proposal, in effect, cuts out the financial middlemen. He would keep the cheaper loan program where the government uses its own money to make subsidized student loans. (Private companies could still get paid to handle the paperwork for making and collecting the direct federal loans.) Savings from this change would let the federal government offer low-income students more grants for their college education.
In Alaska, the private, for-profit student loan business isn't very big. Most student loans are handled through a state agency, the Alaska Student Loan Corp. Instead of taking the federal subsidy as profit, the agency trims the interest rate it charges students. In the past, it has cut the basic interest rate by as much as 3 percentage points -- a huge savings to students -- though the current discount is only 1.2 percent.
U.S. Sen. Mark Begich says he's pushing for a compromise version of student loan reform. "I think he's (President Obama) on the right track -- let's not subsidize the banks on this," Sen. Begich says. But he also sees how the president's plan would create havoc for Alaska students. (Sen. Begich was on the Alaska Student Loan Corporation's board for seven years.) Sen. Begich wants to enable Alaska's nonprofit student loan agency to continue business as usual while cutting out the costly subsidies to commercial banks.
That's exactly the right approach. Federal subsidies for the private student loan industry are overly expensive and have led to abuses. It's another case where the federal government socializes the risk for an industry while privatizing the profits. Congress should follow Sen. Begich's lead and support student loan reforms that make sure the benefits of federal subsidies go to students, not private industry.
BOTTOM LINE: Alaska's nonprofit student loan agency should be able to continue business as usual, while the federal government cuts out costly subsidies to commercial banks.