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Higher Ed Watch

A Blog from New America's Higher Education Initiative

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The Sorry State of the Student Loan Industry

Published:  March 31, 2011

Yesterday, The Chronicle of Higher Education ran a story about the sorry state of the student loan industry. Throughout the article, we are told that the demise of the Federal Family Education Loan (FFEL) program last year has led student loan companies and guaranty agencies to lay off thousands of workers and eliminate college access programs they managed. While some lenders and guarantors are coming up with “innovative ideas for helping people pay for college” in order to survive, “many of the ideas may not work out, which could lead to a further shrinking of the industry,” the article states.

After reading the story, even we at Higher Ed Watch felt a lump in our throats. That is until we remembered an essential point that the article neglected to mention: the one and only purpose of the federal student loan program is, and has always been, to ensure that all college students have access to affordable loans for any school they wish to attend without delay or disruption. By all accounts, the U.S. Department of Education’s Direct Student Loan program is carrying out this job quite well -- and at a much lower cost to taxpayers.

As Higher Ed Watch contributor Jason Delisle has pointed out frequently on this blog, the FFEL program was not intended to be a full employment act for lenders and guarantors. It certainly was never the government’s responsibility to ensure that all the staff student loan companies hired during the boom years -- when the government was showering them with excessive subsidies -- continue to remain employed in perpetuity. As Jason wrote back in 2008:

While we are sympathetic to the hardships that these job losses cause individuals and their families, we take issue with the argument that FFEL job losses represent a major public policy problem…Wastefully high subsidies encourage lenders to hire more staff to compete with one another for market share. In this regard, FFEL creates jobs -- marketing, processing, servicing, political fundraising, and Congressional lobbying jobs. But were these additional jobs necessary to accomplish the FFEL program’s goal of getting students loans with beneficial terms set by Congress? Or, put another way, is the current reduction in FFEL jobs going to prevent students from obtaining government subsidized student loans?

We are sympathetic to those who lost their jobs (with the exception of the lobbyists and fundraisers, who are never for a lack of work in the nation's capital). But if they are looking for someone to blame, they should look no further than their former employers. As we’ve said before, FFEL would not have been such an obvious target had it not been for all the corruption that ran rampant in the program.

For much of the last decade, the student loan industry ran amok. When it came to power, the Bush administration put loan industry officials and lobbyists in charge of the Education Department. Meanwhile, lenders such as Sallie Mae and Nelnet showered Congressional leaders with hundreds of thousands of dollars in contributions each election cycle. The result: a virtually unregulated industry exploiting a federal program to enrich itself at the expense of students and taxpayers alike.

These were the years in which, among other things:

All the while, the Education Department's direct loan program was delivering the same federal loans to students at lower costs for taxpayers and without all the scandals.

For the Obama administration and Congress, the choice was easy. To have kept the FFEL program in place for the sole purpose of saving loan industry jobs would simply have been irresponsible to taxpayers and students alike.

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