Stop Washington's student-loan takeover

U.S. Education Secretary Arne Duncan says removing the middleman - his term for the private sector - from giving student loans will save the nation about $87 billion over 10 years, money that could be used to provide more Pell grants to poor students.

It sounds nice, but we don't buy it.

In essence, the government would take over the student-loan industry, eliminating competition and choice.

Any savings, we suspect, would quickly evaporate once the federal government had the student loan business to itself. Look for inflated administrative costs, poor service and increased defaults.

At issue is the Student Aid and Fiscal Responsibility Act, which would require students seeking a college loan to obtain it directly from the government. The legislation was passed by the House last year and will be considered by the Senate this year.

Duncan, a respected educator who embraces school accountability, vouchers and other worthy reforms, is correct that some changes are needed, particularly that students should not be encouraged to take on suffocating debt. But Washington should be seeking to increase the private sector's role in aiding students, not trying to squeeze it out.

In the past, the private market provided the bulk of student loans under a program in which the government guaranteed the loans. The government's direct lending to students provided only about a quarter of all loans.

Things dramatically changed in 2007 when Congress adopted, and President George W. Bush signed, the College Cost Reduction Act, which reduced the subsidies to private lenders. Many got out of the business.

The credit crunch further handicapped private lenders. Schools such as the University of South Florida have had little choice but to turn to Washington's direct lending.

The administration's plan would complete the public takeover.

Duncan insists not many private jobs would be lost, because the government would use the private companies to "service" the loans, ensuring payments were made and such.

But those in the industry say the 2007 legislation already has eliminated tens of thousands of jobs. With their role further minimized, it's likely companies struggling to stay in the student-loan business would throw in the towel.

It is true these private companies profited, some excessively so, by issuing the federal-backed loans. But for the most part, that profit motive, and the need to compete with other lenders, forced the private firms to offer options and services that the government is not likely to replicate.

Billie Jo Hamilton, USF's director of university scholarships and financial aid, says from "a student's perspective, the private lenders used to have a lot to offer."

The companies, she says, would reduce interest rates, forgive final payments and take other steps to help students repay the loans. But with the private lenders being forced out of the market, those amenities are no longer available.

Hamilton does say the government's direct lending appears to be working. So let Washington continue to participate, just not engage, as Sen. Mike Johanns of Nebraska puts it, in a "hostile takeover of the student loan business."

Senators should consider the words of Caesar Storlazzi, the chief financial aid officer at Yale, who told The New York Times, "It feels like a federal takeover." With the private sector involved, "we get better prices and services."