The Corner

Obama Remakes the Student-Loan Industry

The president, by way of administrative fiat, plans to continue redefining the federal student-loan industry, making taxpayers absorb the financial risks of federal direct lending and leading the country over a cliff into future funding shortfalls. On Wednesday, the president announced his executive order to reduce monthly student-loan payments, consolidate loans into direct loans, and offer loan forgiveness after 20 years, all in the name of college access.

President Obama’s executive action would cap monthly repayment at 10 percent of discretionary income and offer students an incentive for consolidating Federal Family Education Loans (FFEL) and direct loans into the direct-loan program, which administers loans directly to students, instead of having them issued by banks. Students will be given a 0.5 percent interest-rate reduction for switching to the direct-loan program.

But why the urgency to employ executive action to shift to the direct-loan program now? The federal government is currently lending to students at an interest rate of 6.8 percent while it is borrowing at less than 1 percent, and the difference is kept by the federal government and spent on other programs, like converting the popular Pell Grant program into an entitlement. The president is lobbying for more students to move to direct loans so that the government can spend the money elsewhere. As Rep. John Kline, chairman of the House Committee on Education and the Workforce, said, “It’s a pretty big slush fund.” Under the Healthcare and Education Reconciliation Act, all new federal student loans are now direct loans, but there are still $400 billion outstanding loans that are not.

But these “savings” are misleading, as future shortfalls are inevitable. These loans are riddled with risk. When pressed by a reporter about why students would want to pay back the loan if they will be forgiven anyway, Secretary Duncan simply said that “people want to do the right thing.” However, student-loan default rates have been increasing for nearly ten years and are now at 8.8 percent. On top of these high defaults, the jobless rate for Americans with at least a bachelor’s degree is now 5.1 percent, the highest since 1970. 

As former CBO director Doug Holtz-Eakin wrote, “The Secretary of Education is now one of the top financial executives in the U.S., and Congress spent nearly all of the over-estimated ‘savings’ on the President’s health care reform and unaffordable education entitlements and will add more than a trillion dollars of risky loans to the national balance sheet by 2017.”

In addition to the increased risk, there are growing concerns that switching to direct loans has hurt customer service for students, who need information and attention now more than ever. There are also concerns about the Department of Education’s capacity to administer loans directly. 

Coincidentally, according to a new poll, more than 54 percent of people under 30 disapprove of President Obama’s performance. The president has come a-courting in fear of losing the youth vote.

And have the Republicans done nothing, as the president chastised? House Republicans released a proposed budget for FY 2012 in September with substantive reforms to student financial aid by encouraging students who attend college to finish sooner, by changing eligibility requirements and keeping the president’s “gainful employment” rules from taking effect, which would detrimentally prevent lower-income and minority students from access to college. It would also save $2.3 billion — real savings.

The president closed his speech by saying, “It’s time to put country ahead of party.” More government subsidization of higher education has not helped students, the economy, or the country; it’s time to make real reforms and not just rely on gimmicks. The very students he wants to educate won’t have a future if the federal government cannot get its house in order.

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