Federal government quietly takes over student loan market

We’ve been monitoring the health care debate for weeks, but there are many other incremental changes the Obama administration wants to do to federalize more and more of what used to be the private sector. Student loans could soon be the exclusive realm of the feds if people do not search for monthly loan no credit check to repay back the loan quikly.

This is a perfect example of the federal government legislating a private business activity out of existence. The private loan market is already regulated by the federal government since they guaranty a good portion of the loans.

Yes, in my opinion this is a working example of what may happen with health care.

Although there is a measure of risk – as there is in any business venture – lenders have been able to raise capital to provide funding for student loans in the open market. Lenders pay a fee to the federal government to insure the loan and if the student defaults, the government pays.

The catch for the lender was a limited return, the federal government regulated the total return on the investment.

In September of 2007, Congress passed and President Bush signed the College Cost Reduction and Access Act of 2007. This complex legislation changed the market for student loans dramatically. Among many other changes, the interest rates on subsidized Stafford loans was cut in half – from 6.8 percent to 3.4 percent – by July 2012.

Even those graduates who had loans with private institutions or Sallie Mae were given the opportunity to go federal; consolidate their loans with the government’s Federal Direct Loan program and be qualified for the loan forgiveness program – meriting a story itself – if the student holds a “public service job” for 10 years while making their loan payments.

The legislation also dramatically cut into the profits of financial institutions who were working to gather private dollars to lend. Title III of the legislation. …

  • Eliminate the “Exceptional Performer” status that allows lenders that meet certain requirements established by the Secretary of Education to receive higher insurance rates on defaulted loans
  • Reduce the insurance paid by the federal government to lenders on defaulted loans from 98 percent to 97 percent of unpaid principal balances through October 1, 2012 at which point the insurance will be reduced to 95 percent
  • Reduce the amount that guarantors may keep through collections on defaulted loans from 23 percent to 16 percent
  • Reduce the special allowance payments (SAP) from the Department to lenders based on their tax status. For-profit lenders would receive a 55 basis point SAP reduction and non-for-profit lenders would receive a 40 basis point SAP reduction. To ensure that only nonprofit lenders benefit from the increased subsidization, nonprofit lenders that are owned in-whole or in-part by a for-profit entity would not be eligible for the reduced subsidy reductions. Nonprofit lenders that are purchased by for-profit entities would also lose their higher subsidization rates on the date of the sale.
  • Increase the loan fee paid to the Department by lenders – that cannot be passed on to borrowers – from 0.5 percent to 1 percent of the principal amount of each newly originated loan made on or after October 1, 2007
  • Decrease the account maintenance fees paid by the Department to guarantors from .10 percent to .06 percent on newly originated loans

If your going to do the work and find the private funding to loan to students, you need to make some sort of reasonable profit. The legislation dried up the profits, and nobody wanted invest capital in a vehicle that was guaranteed to make zilch. From the Wall Street Journal this morning. …

The system broke down after Congress in 2007 legislated a return so low that no private lenders could make money holding these assets. To keep the money flowing to student borrowers, the government began buying the loans from private originators last year. But this larger federal role was intended to be temporary, with an expiration date next summer. The news from Washington now is that rather than scaling back federal involvement, the pols want the U.S. Department of Education to be the exclusive banker to America’s college students.

It’s not a popular idea on campus. Loans directly from the feds have been available for decades, but the government’s poor customer service has resulted in most borrowers choosing private lenders. This week three dozen college administrators, representing schools from Notre Dame to Nevada-Reno, signed a letter urging a longer transition period to this “public option.” The fear is that the bureaucrats will not be able to pull off a takeover in just eight months. “Any delay in getting funds to schools on behalf of students will result in our needing to find resources at a time when credit is difficult to obtain,” warns the letter.

So what very well could happen is the federalization of the entire student loan market within months, and no, it won’t be increasing competition or reducing costs. How much cash and control are we talking about? Millions? Billions? How about $1 trillion dollars. From the Journal’s lede. …

The furor over President Obama’s trillion-dollar restructuring of American health care has left his other trillion-dollar plan starved for attention. That’s how much the federal balance sheet will expand over the next decade if Mr. Obama can convince Congress to approve his pending takeover of the student-loan market.

Volokh Conspiracy has more and a discussion, and don’t forget the other student loan flap reported in the Washington Times Aug. 25. …

A month after they voted to punish some corporate executives for taking hefty bonus payouts, members of the House of Representatives quietly gave their own staffers a new potential bonus by making even their top-earning aides eligible for taxpayer dollars to repay their student loans.

The change, which took effect in May, means House employees earning up to $168,411, or the top level, are now eligible for government-funded subsidies to help pay down their student loans.

House officials defend the change as a job-related benefit necessary to keep the government competitive in the hiring market – the same argument corporate chieftains used to defend their own pay scales.

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Steve McGough

Steve's a part-time conservative blogger. Steve grew up in Connecticut and has lived in Washington, D.C. and the Bahamas. He resides in Connecticut, where he’s comfortable six months of the year.


  1. Dimsdale on September 12, 2009 at 6:16 pm

    "The system broke down after Congress in 2007 legislated a return so low that no private lenders could make money holding these assets…."


    Notice a trend here?  The government meddles, screws up the system, then "has" to take over said system because it is "broken" or "corrupt" or whatever.


    Hugo Chavez never had it so good.

  2. PatRiot on September 16, 2009 at 4:45 pm

    As important as the health care debate is, it is almost a red herring. What ELSE is being done while attention is on health care?

    90% of the mortgages are now in Gov't hands, the deficit is HUMUNGUS and now the student loans !! Can you say indetured servants/financial slaves ??

    Can we now say that the Gov't is 100% vertically integrated? Or is there something I missed?

    Womb to the tomb care ensures the most optimal human will be born, groomed (as in programmed / dumbed down), extorted and externminated in the most finacially profitable way. And being in Gov't housing means one can be moved to ANY OTHER Gov't housing – for efficiency comerade.

    Nothing personal, just BIG business.

    As I said early on – What's that coming…another Dark Ages?

    I gotta go, I'm scaring myself.

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