A Government Power Grab Disguised as Student Loan Reform

In the summer of 1996 I could not wait for the fall when I would be starting my college experience at the University of Oklahoma.  At that point the only major worry I had about my impending freedom was how I was going to pay for this adventure. 

Unfortunately my parents were not able to help me out, and though for the first year I had won a few scholarships and “fee waivers” because of my grades, there was still a pretty sizable financial void I would have to fill.

Thus, a few months before I headed off to school I went down to the local branch of the Bank of Western Oklahoma, sat down with a friend of mine’s mother who was a loan officer, and began the process of borrowing my life away to pay for college. 

This initial experience with getting those student loans was efficient, easy, and pretty painless.  All it took was a meeting with my friend’s mom, some paperwork, and a follow up meeting a week later to finish up the process.  With that, I was set for the next 5 years of college.

It really was that simple and that quick.

Fast-forward to 2010.  I am standing in the middle of a lecture hall on a university campus speaking to around 100 very quiet students about the importance of playing a role in the political process.  My initial question to them revolves around if they are aware of what happened the previous weekend in Washington.  Their collective answer is a sporadic grumble that resembles “healthcare reform passed”.

My follow up question is something along the lines of how this healthcare reform passage affects them.

Two brave souls speak up.  The first guy says something about higher taxes.  I laugh and say that is probably true.

Then a second guy says something completely unexpected: “The government is now going to be the ones issuing student loans.”

Wait, what?  Seriously, a 19 year old with unlaced sneakers and a t-shirt 3 sizes too big knew about that?  Very impressive.

But he is right.  Inside of the massive and expansive health reform bill was a student loan reform bill as well.  A reform bill that takes away the ability of private lenders (like my hometown bank) to initiate and issue student loans.

According to this editorial by the Newark Star-Ledger, now instead of going to privately owned financial institutions, “families will be able to apply for the government’s Direct Loan Program through college financial aid offices”. 

And yes, this editorial board considers this a good thing.

The editorial goes on to say, “The changes make sense for students, parents, colleges — for everyone except the loan companies losing their unnecessary role as middlemen. When the Senate passes the health care reconciliation bill, this will be another reason to cheer.”

Did you see that?  The underlying message from this editorial board is that banks and other private financial institutions are greedy and selfish because the federal government has used them to distribute and issue student loans.  And those privileged bankers have made money off of this?  Oh, the humanity!

What this editorial did was make me even more curious about the aspects of the student loan reform.  So I did some digging.

First, I wondered if banks and other financial institutions really made that much money off of student loans.  I posed this question to a banker friend of mine who works in lending, and he looked at me and laughed.  He explained that even when the bank does issue the loan at a higher interest rate, it is not enough to make then bank any money when you count the man hours and governmental fees associated with issuing the student loans.  If fact, he said, the bank loses money on them and simply employs them as a service to students.

But I thought the banks were greedy and were using the students’ desperate situations for private jets and parties for their Wall St cronies!?!?

Secondly, in looking at this editorial, I wondered why anyone would want the government to take over an industry that is doing something well.  Sure, there have been “scandals” associated with the student loan process, but are government run bureaucracies any different?  No, and in fact they are worse (see Freddie and Fannie). 

What this editorial blatantly and unapologetically shows is the philosophy of the left that the government can always do something better than private business.  But we know from a hundred years worth of examples that his is simply not the case.  In the instance of student loans, overnight our country goes from having literally millions of banks to handle millions of student loans to one government agency handling the millions of student loans.

Yeah, I bet that is efficient. 

So efficient that surely other questions will not arise about where you actually go to get your loan or how much of your personal information will the government have or who will ultimately approve or decline your loan.  Plus, I am sure that there is a plan in place for the massive structure for which this program will undoubtedly need.  At least we know they will have to hire thousands of new governmental employees to work there. 

Oh good, more government expansion. 

Lastly, like many other ways in which the government is operating now, the underlying problem is that the government is overstepping its bounds and trying to create a solution where there is no major problem.  But who cares if there is no problem – the banks are making way too much money on poor college students, and this must be stopped.  Where does the solution lie then?  With the government of course!

In reality, what we have is the United States government taking over yet another private industry because it feels like it can operate it better.  What the result will be is longer lines and more red tape, more confusion and frustration about the process and the hoops families will have to jump through to get their student loans, and the government having more of our personal information to use as it sees fit. 

The entire scenario is a nightmare for parents and student alike.  And that is what our government has created through this terrible piece of legislation.