If the Obama administration has its way, the government could soon take over the student loan system. The move has been criticized by many people, including Lamar Alexander, the U.S. secretary of Education from 1991 to 1993.
The administration’s proposal is that from July, about 19 million students who seek government backed loans for education should apply directly to the U.S. Education Department. This is in stark contrast to the current system where students and their educational institutions exercise their choice in deciding on lenders.
The justification behind the proposal is that it would lead to about $87 billion in savings, mostly because the banks that currently profit from student loans would not be involved. The savings will be used on other government programs, including Pell Grants, which are used to fund low-income undergraduate students.
The main criticism of the proposal is that the government will be using the interest earned from students on other programs, or for providing loans to other students. The government will be funding these loans through money from the Treasury, which it gets at very low interest rates. But the rates that the students will be charged will be significantly higher, by as much as 4% according to some estimates.
Critics have accused the government of profiteering from the students. They say that the government could have instead chosen to pass on the savings to students by offering them loans at lower interest rates, which would have saved an average student over $2,000 in interest payments.
Another criticism hurled at the plan is that the administration has overestimated the $87 billion savings that it claims taxpayers would get. The true savings, they say, are about $47 billion. Yet another disadvantage would be that the plan would mean closure of many non-profit student lenders who perform important functions like educating the students about the college admission process.
There is also some concern that when the government takes over the lending process, it would bring inefficiencies in the system. Students will have to deal with a bureaucratic setup to get a loan, which would be a big waste of time and effort. This problem is clearly highlighted by the fact that in the past most students have chosen private lenders over the government.
While the administration claims that its intention is to help the taxpayers, it has been accused of seeking political mileage at the expense of students.