If your philosophy is that government can do everything better than the private sector, eventually you'll luck out and hit one area where that otherwise nutty philosophy happens to be true. President Obama's plan to end private student lending and channel all loans through the direct federal program is the right way to proceed.
Ever since Bill Clinton initiated the direct student lending program, it has offered lower-cost loans to students and given them an alternative to the high-handed rip-offs to which they are exposed when the funding comes from private lenders. The special interests -- particularly Sallie Mae, the leading student lender -- forced Clinton to allow private lending alongside the government program. Now Obama is trying to eliminate it. And wisely so.
This issue has nothing to do with growing government. The taxpayer already subsidizes the interest rate and guarantees the loan, whether through direct public lending or private firms. The issue is: Should the lenders make a profit, or should the student pay a lower interest rate?
Private lenders charge more than the government does in interest and are particularly vicious in their collection practices. Even though the government pays them 97 percent of the principal and interest should a student default, the lenders vigorously pursue collection, since they get to keep more than half of whatever they get even after the feds have repaid them for almost the full value of the loan. These loans, which are not dischargeable in bankruptcy, may not be refinanced. Once you take out the loan, you are stuck, even if interest rates should drop decisively.
Particularly interesting is Obama's plan to recycle the savings from replacing the private program with a public one into the Pell student grant program. With almost $100 billion in savings projected over the next decade, the tradeoff is very attractive.
To battle against Obama's program, the private lenders have hired former Clinton Deputy Attorney General Jamie Gorelick to lobby against it. Gorelick has great credentials to fight for Sallie Mae. She sat on the board of Fannie Mae (no relation) as it piled up billions in subprime lending obligations and got out in time to collect millions in bonuses.
Republicans and some Democrats -- who are beholden to Sallie Mae and other private lenders for their generous campaign contributions -- will try to pretend that this issue is one of big government vs. small government. It is not. The issue, in its starkest terms, is high college costs vs. somewhat lower costs. Our kids, and their parents, deserve a break.