A good editorial in the NYT yesterday:

 February 8, 2010

Editorial

www.nytimes.com/2010/02/08/opinion/08mon2.html?

Lobbyists and Students

The private lending companies that earn billions of dollars in undeserved profits from the federal student loan program are working overtime to kill a bill that would stop their gravy train once and for all — and should have been enacted long ago. The House stood up to the powerful lending lobby last fall and passed a student loan reform bill. The White House has been pushing the Senate, but it is having trouble finding its spine and has yet to introduce a bill.

The House version phases out the wasteful part of the federal college lending program that pays private lenders a rich subsidy to make risk-free loans that are guaranteed by the government. The bill also expands another, more reliable and less expensive federal loan program that permits students to borrow directly from the government through their colleges.

The arguments for moving in this direction are irrefutable. The subsidized program, for example, was supposed to keep loans flowing during recessions. But the loans dried up in the last credit crunch, forcing the government to rescue the program. The direct program, by contrast, suffered no such disruption. In addition to being more reliable, the direct program costs less. The Congressional Budget Office estimated last year that the country could save about $80 billion over the next decade by ending the private system and moving to the direct one.

Outmaneuvered on the merits, the lending industry has resorted to scare tactics and distortions. The claim that the direct system would amount to a government takeover of the system is absurd. The direct loans would not be handled by the government, but through colleges and universities, just as Pell grants are now. The loans would be collected and administered by private companies, which are actively competing for the business.

Some lenders say the new system would lead to more student defaults, but contracts between the government and loan-servicing companies clearly state that the companies will be evaluated partly on how successful they are at preventing defaults.

The claim by lenders that the direct system would bring huge job losses is also implausible. The work force that would be required to service, say, $500 billion in outstanding loans would be nearly as large as the work force required to lend that amount.

The new system would, of course, cut into lenders' profits. But by redirecting the savings into a variety of federal programs aimed at needy students — including the Pell grant scholarship program — Congress would be putting the money to good use.