Tuesday, May 18, 2010

Eliminating the Middle Man in Student Loans

I was unaware of this issue before running across this broadcast.  The Federal Government is eliminating private banks in direct lending of Government Money to students.  The money that they are saving by eliminating this outsourcing will be funneled back into the system in the form of pell grants to the neediest students.  I'm not sure if this is a bad thing or a good thing.  I know that banks have not been as responsive and obliging as one would think a private company should be to its customers, i.e. when you can't pay, they don't care.  The government is notorious for red tape and bad customer service--but at the end of the day, they are accountable to the citizens of this country.   The interest rates on these loans will be set by Congress, at a whopping 6%.  However, it's even higher with private lenders--12%. I guess we will see how this plays out come the Fall. Maybe the Government will have a problem with the constantly increasing costs of education in this country.  Let's hope this is a step in the right direction.


  1. It will be a good thing and a bad thing. More people will be enticed into going to college, causing a further over-supply of college grads. But yet, at least fewer people will be strapped with private loans - at atrocious interest rates and terrible loan terms.

  2. Here's the problem with more Pell grant monies available to students...the colleges will hike up tuition. It's already happening.

    Another thing that will happen is that more of those for-profit "colleges" like University of Phoenix will lure people in just to take advantage of the grants and government-backed Direct Loans.

    Maybe the NY Times is right and prospective students should rethink higher ed altogether:


  3. To know what it takes to solve the problem of students being fleeced, you first need to understand the nature of the problem. College tuitions are so expensive because the government guarantees student loans. Guaranteeing student loans signals universities to hike up tuition rates.

    Unfortunately for all of us, this proposal is nothing but bad news. Loaning directly to students while reducing the amount a student is required to repay will actually encourage colleges and universities to increase tuitions even faster, as students will be more willing to assume larger debts which they are not legally required to repay. Further, taxpayers will be forced to pick up a much larger share of inflated tuitions and absorb bigger losses on defaulted loans.

    In sum, college tuitions are so high because government involvement is preventing free market forces from properly functioning. The answer is less government involvement in education, not more government involvement.

    For more on how government involvement causes tuition costs to skyrocket, see:


  4. I'm sure everything will be great now (*ignore reporting about pretty much null effect of the government's foreclosure program)! Over 2000 years ago, Democritus the Laughing Philosopher thought "Education is an ornament for the prosperous and a refuge for the unfortunate." It does me good to see that we carry on as many Greek traditions as we can in our modern democracy.

  5. @3
    Government is supposed to be representative of the will of the people. In theory, the politicians are being convinced that eduction is the source of power and prosperity. That, rather than simply "the government" is the force that needs to be rehabilitated before there can be any change to the approach the fed uses when financing student loans.

  6. The same thing happened in the mortgage market, to wit: Fannie Mae, Freddy Mac. The bootom line is the less government intervention, the better. Let the free market rule and hopefully tuition costs will normalize over time. When the gov't increases the amount of loans available to students, this is money grab by the schools to increase the tuition accordingly. Thankfully I'm done with school.



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