Who Wins With Student Loan Subsidies

Tuesday, May 1, 2007

The April 23 editorial "Lender's Paradise" reflected a misunderstanding of the role of America's student loan providers, which for more than 40 years have given students access to the best higher education system in the world.

The editorial asked, "Why continue to subsidize these firms?" Since 1965 Congress has understood that it's unreasonable to expect well-run financial institutions to lend at below-market interest rates to individuals with no credit histories, income, collateral or cosigners. Congress also understood that there is no free lunch; an innovative, efficient program that gives families a choice of loan providers that offer federal student loans carries a price.

So lender subsidies remove much, not all, of the risk of making student loans. Without the subsidies, we would not have a low-cost, private-sector-based program. This is no more "corporate welfare" than are government payments to doctors and hospitals for caring for Medicare enrollees.

The private sector has been responsible for major technological and service innovations in the federal student loan program. Student loan borrowers have long benefited from innovations that the IRS, for example, is just now introducing. And default-avoidance programs offered by loan providers are largely responsible for program default rates lower than rates in the Education Department's Direct Loan Program.

Finally, because loan providers compete with one another, borrowers typically save thousands of dollars. In fact, federally guaranteed loans are the lowest-cost student loans available. To families struggling to pay for college, choice and competition in student loans are a "Borrower's Paradise."


Executive Director

America's Student Loan Providers


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