A Halfway Measure on College Loans

EDITORIAL / NYTIMES
July 12, 2005
A Halfway Measure on College Loans

Correction Appended

The Republican Congressional leadership had to be dragged, kicking and screaming, but it has finally pledged to do the right thing and close an appalling loophole that permits lenders to skim billions from college loans, money that should be going directly to students. The loophole, which guarantees lenders a mammoth 9.5 percent return on loans for which the prevailing rate is 3.5 percent, is especially outrageous at a time when college aid is falling far short of the national need.

But ending this part of the giveaway is just a start. Lawmakers should also embrace a bipartisan bill, the Student Aid Reward Act, that would wean lenders and colleges off the subsidized system, known as the Federal Family Education Loan Program. Instead of offering private lenders unnecessary federal subsidies to make government-backed loans, the measure would encourage schools to use a system that would actually turn a small profit for Washington by allowing students to borrow directly from the government through their schools.

The lenders have done a good job of confusing lawmakers with trumped-up numbers. But analyses by the Congressional Budget Office and the Office of Management and Budget have shown that direct loans are considerably cheaper. They require no subsidies to the banks and return interest payments to the government itself.

The pending bill - sponsored by Representatives Thomas Petri, Republican of Wisconsin and George Miller, Democrat of California - would allow colleges to keep half of the money saved through direct loans. The schools would pump that money back into student aid. Such a step would be useful indeed, given that hundreds of thousands of students are being turned away from colleges for financial reasons.

Correction
An editorial on the federal student loan program misidentified Representative Thomas Petri. He is from Wisconsin, not Ohio.
http://www.nytimes.com/2005/07/12/opinion/12tue2.html?th&emc=th