Carl Horowitz

America’s colleges and universities might not qualify as bailout material, but the nation should get ready for what amounts to a federal takeover of higher education financing. Legislation signed March 30 by President Barack Obama practically seals the deal. And despite the administration’s claims to the contrary, taxpayers may find the transition exceedingly expensive.

The measure, tacked onto the massive health care overhaul, requires that campuses using the prevailing system – federally-guaranteed private-sector lending – must move to federal direct lending. The latter program has been in place for more than 15 years. President Obama wants to make it the only game in town. Banks, credit unions and other private lenders would still be allowed to operate, but without backing from Washington. With an Obama-style ‘let’s-get-it-done’ clap of the hands, the law mandates that all colleges and universities switch by July 1. The legislation also relaxes loan repayment terms; provides massive funding for Pell Grants; and boosts aid to historically black institutions.

The president is trumpeting the switch to direct lending as a victory for the American people and a blow to avaricious lenders and servicing firms. “For almost two decades,” Obama announced at the signing ceremony on the Alexandria campus of Northern Virginia Community College (where Vice-President Joe Biden’s wife, Jill, teaches English), “we’ve been trying to fix a sweetheart deal in federal law that essentially gave billions of dollars to banks. Those were billions of dollars that could have been spent helping more of our students attend and complete college.” Those “unnecessary middlemen,” as Obama described them, now would be virtually obsolete.

The White House estimates elimination of government fees payable to private-sector intermediaries would save taxpayers $68 billion through 2020, a savings that presumably will pay for other programs. Yet experience suggests that the savings will not materialize and that more taxes will be needed.

Before casting doubt on the new system, it’s essential to understand what it replaces. That would be the Federal Family Education Loan Program, or FFELP. Created by Congress in 1965 as part of the Higher Education Act, FFELP is an elaborate public-private partnership in which participating for-profit, nonprofit and state lenders underwrite and/or service loans to borrowers with a limited income or credit history.

Carl Horowitz

Carl F. Horowitz is director of the Organized Labor Accountability Project of the National Legal and Policy Center, a Gold Partner organization dedicated to promoting ethics in American public life.
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