Monday, April 13, 2009

Student Loans: Obama Reform or Bank Rip-Off?

David Herzenhorn's reportage in today's Times isn't as clear as it could be. But once you struggle through the disorganized mess of one-the-one-hand -this, on-the-other -hand-that, the bottom line is obvious enough: the Obama administration wants to save taxpayers $94 billion over the next ten years by having the federal government directly administer Pell educational loans itself, rather than continuing to let private banks horn in on the action as middle men out to make a profit.
Critics of the subsidized loan system, called the Federal Family Education Loan Program, say private lenders have collected hefty fees for decades on loans that are risk-free because the government guarantees repayment up to 97 percent.
Historically, government-backed student loans have been pretty much a government show from start to finish. They still are. "Privatizing" them by letting banks play the middle man has never been an efficient or sensible use of taxpayer money.

What do the banks do in exchange for the huge profits they snap up? First on the banking industry's list of talking points is "marketing." Second? "Customer relations."

Oh my, what a crock! As anyone ever associated with higher education can tell you, the last thing student borrowers or tuition lenders need is to see money thrown away on "marketing" and "customer relations." Almost everywhere, students in need know where to go and the colleges administer the loan programs all by themselves.

It has ever been thus. Nary a student in the nation gets the idea to borrow for college from a bank "marketing" campaign, any more than cancer patients get the idea to go for chemotherapy or radiation from television ads. Cancer victims rely on their oncologists. Needy students rely on the college financial aid office.

No one in his right mind turns to private banks when they want to apply for a loan. They know that if they do, they'll simply be referred back to the source: the college student loan office.

Allen Boyd (D-Fla) must know this. That's why, we imagine, he makes an even less persuasive argument against the Obama administration proposal: jobs.
“The president’s proposal,” Representative Allen Boyd, Democrat of Florida, said in a floor speech, “could be detrimental to thousands of employees who serve in the current student loan industry throughout this country, 650 of which are located in Panama City, Florida.”
Boyd's numbers are suspect, of course. It's hardly conceivable that as many as 650 private banking employees in Panama City, Florida are engaged, day after day, in the utterly useless make-work of "marketing" student loans to students. If they are, their work assignments should be redirected.

How about re-assigning them to, say, the home mortgage department to disperse all that TARP money? As Elizabeth Warren says, "ultimately, the banks exist to serve the American people. Not vice versa.


been there said...

Having been a consumer of federally insured student loans, I too once marveled at how much banks got to skim off the top for "processing" the loan application. But it may have been worth it in the long run.

The process was very simple for the consumer and one might argue that overall it was more cost efficient for the government.

I'll give you an example of how badly the government can muck things up. When I retired from the military, I was told to file my health record with the Veterans' Administration. It took two months and over 30 phone calls to St. Pete, Washington, DC, Denver, Mobile, New Orleans, Pensacola, and Ft. Walton Beach, and hours of waiting on hold, to find the answer I needed was less than two miles from home: "You're good to go."

I'd hate to see prospective students have to navigate through that morass. There are enough roadblocks to youngsters taking the next step.

With that said, it may be that banks are not the answer, but my bet is that they are better than a government office.

Anonymous said...

As someone who benefited from student loans many years ago, loans that the government processed and ultimately collected upon, I say keep the bankers out of them. What is so complicated about processing a student loan? You show up on campus, there is a loan processor there who talks the group of students through the forms, you hand the forms over to the processor when finished, and in a couple of weeks the checks show up in your mail. At least that is how I did it at my university, and I never had any problems.

The bankers are only a part of the process in that they are making the costs of those student loans more expensive...for the student. Those marketing costs aren't being paid by anyone else.

Comparing the VA and the poor management of it, of which my husband has participated in since he is a retiree, to the government run student loan program, is really quite a stretch, imho.

My husband retired in 2002 and he made one stop to get his records and his care set up after his retirement with the VA. The local VA provided excellent service and we found them very easy to work with, as well as very timely. Yes, I speak of the VA clinic right here in Pensacola.

I hope to see student loans change back to being something that is offered as a true benefit to a struggling student, without the banks providing the middleman services that ultimately only cost the student more.

Foxwood said...

Remember Animal Farm. Napoleon is going to take your puppies and they will come back to bite you. A student loan bring with it servitude.