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Students: Obama Is Coming for Your Stafford Loans


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Stephen Spruiell

The Obama administration is trying to strong-arm America’s colleges and universities into complying with a bill that hasn’t been signed into law yet. The bill, which would replace current subsidized-student-loan programs with a government-run system, passed the House last month, but its fate in the Senate is far from clear. Sen. Tom Harkin, chairman of the Education Committee, plans to use the budget-reconciliation process to pass the contentious bill with a simple majority, but The Hill newspaper reports that it might not even have 51 votes. The bill is far from a fait accompli, making the administration’s pressure campaign all the more egregious.

Education Secretary Arne Duncan sent a letter Monday to colleges and universities urging them to make sure they are ready to switch to the government-run system for the 2010-11 academic year. But most of the nation’s 5,000 colleges and universities prefer to work with private lenders. Under current law, the government offers subsidies to banks and non-profit lenders that make low-interest loans (called Stafford loans) to college students. Since 1993, the government has also made subsidized loans available through a direct-lending program — think of this as the “public option” for student loans.

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The public option has proven unpopular: Except for a credit-crunch-related spike last year, its market share has fallen steadily since its inception. Schools prefer private lenders because they tend to offer higher service levels with the goal of making students lifelong customers. The government processes paperwork, and that’s about it.

But the Obama administration wants to make the public option the only option, primarily because it’s cheaper for the government to make low-interest loans directly than to subsidize private lenders that make them. For one thing, the government’s administrative costs are lower, as you might expect from a program that offers little to no added value. More significant, moving the loans directly onto the government’s books would allow Washington to hide the true cost of the subsidy. This is where the bulk of the administration’s estimated “savings” comes from.

The Obama administration says the House bill would save taxpayers $87 billion over ten years. (Actually, the net savings would be zero. The administration plans to spend all the money on Pell grants and other forms of means-tested aid.) But Sen. Judd Gregg thought that number looked a little high. He asked the Congressional Budget Office to re-run the numbers after properly accounting for the risk of having all those loans on the government’s books. The new estimate finds that the bill would actually add $40 billion to the national debt.

Not only would the switch be bad for students and for taxpayers, it would also create logistical headaches for universities. Many financial-aid professionals have complained that the administration’s timeline is unrealistic. Colleges and universities start putting together financial-aid packages for the fall semester as early as January. “They’re saying it’s as simple as throwing a switch,” Dewey Knight, associate director of financial aid for the University of Mississippi, tells NRO. “Well, I’m the guy throwing the switch, and I can tell you it’s not that simple.” Knight describes the administration’s attitude as “an insult to people who spent years getting delivery systems in place. We didn’t just throw a switch to get where we are.”

Sen. Lamar Alexander, a former university president and education secretary, agrees. “I think we’re about to have a 14 million-car pile-up on the highways of American education — right after the first of the year, when that many students receive acceptance to college, turn around, and find the whole system a mess.”



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