Reduce subsidies to private student lenders and protect student borrowers

Obama's proposed budget calls for shift from private to government-managed college loans

Updated: Friday, March 6th, 2009 | By Robert Farley

There are basically two kinds of college loan programs: the Federal Family Education Loan Program, in which private lenders make and secure loans to students and receive subsidies from the federal government; and the William D. Ford Direct Loan Program, in which the federal government directly loans to students.

Obama's plan is to shift student lending away from the private loans to the government's direct loan program, which he believes is more efficient and cost-effective.

Obama's proposed budget, unveiled Feb. 26, explains it like this: "Right now, the subsidies in the government-guaranteed student loan program are set by the Congress through the political process. That program has not only needlessly cost taxpayers billions of dollars, but has also subjected students to uncertainty because of turmoil in the financial markets. The President’s Budget asks Congress to end the entitlements for financial institutions that lend to students, and instead to take advantage of low-cost and stable sources of capital so students are ensured access to loans — while providing high-quality services for students by using competitive, private providers to service loans. The approach in the Budget, originating all new loans in the direct lending program, saves more than $4 billion a year, and reinvests it in aid to students."

It's worth noting that somewhere along the line, the administration has changed its calculation on how much this would save — from $6 billion to $4 billion.

We also note that this is a preliminary budget, and Congress hasn't had a chance to weigh in yet. It's also short on details. But this much is clear: The plan would require a major shift in college lending. According to a report from the Education Department, there was $56 billion available in aid to students in 2008 through private lenders in the FFEL Program, as opposed to just over $18 billion in the direct loan program.

"It's a preliminary budget with vaguely worded components," said Jon Fansmith, federal relations associate for the American Council on Education. "It's good to see there is a real focus on student aid. We're encouraged by that. But it's all pretty new. How it all shakes out, we'll have to wait and see."

Still, by including this new direction as a goal of his budget, Obama has moved this promise to In the Works.

Sources: Office of Budget and Management, Budget Documents for Fiscal Year 2010 , Feb. 26, 2009

Department of Education, 2008 Guide to U.S. Department of Education Programs
Interview with Jon Fansmith of the American Council on Education, March 5, 2009