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Why make government the prime source for student loans?

By Lamar Alexander
Sunday, March 7, 2010; A17

While health-care reform occupies the spotlight, the Obama administration is pushing for another Washington takeover -- this time of the student loan system. Last month, U.S. Education Secretary Arne Duncan made the administration's latest pitch on this page.

Here is what the administration and congressional Democrats have told us about this latest attempt: Starting in July, all 19 million students who want government-backed loans will line up at offices designated by the U.S. Education Department. Gone will be the days when students and their colleges picked the lender that best fit their needs; instead, a federal bureaucrat will make that choice for every student in America based on still-unclear guidelines. They say that this will save taxpayers up to $87 billion in subsidies that now go to "greedy" banks. In gleeful anticipation, members of Congress have lined up to spend those billions on Pell Grants and almost a dozen other programs. Banks are punished. Students are helped. Members of Congress look good.

Here is what they haven't told us: The Education Department will borrow money at 2.8 percent from the Treasury, lend it to you at 6.8 percent and spend the difference on new programs. So you'll work longer to pay off your student loan to help pay for someone else's education -- and to help your U.S. representative's reelection.

And there are some other things the government should tell you: The estimated $87 billion in savings isn't real. According to a July 2009 letter from the Congressional Budget Office (CBO) to Sen. Judd Gregg (R-N.H.), the savings are closer to $47 billion including administrative costs, if we use the same "scoring" (i.e., cost analysis) method that Congress required the CBO to use when it scored the Troubled Asset Relief Program last year because the method would more accurately calculate the cost to taxpayers.

Finally, the government should disclose that getting your student loan will become about as enjoyable as going to the Department of Motor Vehicles.

Today, roughly 2,000 lenders offer government-backed student loans on more than 4,000 campuses. One lender, Edsouth, offers Tennessee students college and career counselors, financial-aid training, and college-admissions assistance; performs hundreds of presentations at Tennessee schools; and works with 12,000 Tennessee students to improve their understanding of the college-admissions and financial-aid process.

Nonprofit lenders such as Edsouth use the revenue generated under the student-loan system to operate and provide these valuable benefits -- but, of course, these services cost money. If -- under this latest Washington takeover -- Edsouth and other nonprofit lenders are prevented from making the number of loans they make today, they will no longer be able to provide these services, depriving students of real choices in lending.

The student loan "Banker of the Year" will be the only student loan banker left calling the shots: the education secretary in Washington. Imagine trying to get all Edsouth's services from a federal call center.

I was education secretary for President George H.W. Bush when, in 1991, Congress offered students a choice to borrow from a local lender or the Education Department. In 2008, 15 million students voted with their feet and chose nongovernment lenders -- and only 4 million students chose to get their loans from Washington.

Congress has reduced subsidies paid to lenders twice in the past four years, investing the savings in Pell Grants and other programs. But if there really is $47 billion in savings to be found, Congress should return it to students as lower interest rates, not trick students by overcharging them so Washington can create more government programs.

Seven-eighths of students who applied for federal aid using the Free Application for Federal Student Aid (FAFSA) had an average loan debt of $24,651. Assuming a standard 10-year repayment at 6.8 percent, those students would pay roughly $9,400 in interest. If we really want to save students money, why not just reduce the interest rate by 1.5 percentage points, to 5.3 percent, saving students $2,240 in interest?

If this Washington takeover happens, I propose that all 19 million-plus student loans made by the government carry this warning label:

"Beware: Your federal government is overcharging you so your representative can take credit for starting new government programs. Enjoy the extra hours you work to pay off your student loan."

The writer is a Republican U.S. senator from Tennessee, a former U.S. education secretary and former president of the University of Tennessee.

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