Chronicle Credit

Going deeper to point out banks' loan enigma

A Credit to The Chronicle of Higher Education for some insightful analysis of the government’s rescue plan for the federal student-lending program.

The federal program already hands out interest-rate subsidies and repayment guarantees to enable lenders to offer cut-rate student loans. Now, with the administration’s financial rescue plan, the lenders can either use their portfolios of subsidized loans as collateral for even more government funds or sell the loans outright to the government for more than their face value. Either way, that makes more money available for students to borrow.

Despite approval of the plan from a variety of corners, the Chronicle alerts us to two problems, one for students and one for lenders:

Some students still can’t be sure lenders will serve them this year, and the loan companies have just endorsed a one-year fix that may leave them little or no role in the future of federally subsidized lending.

The New York Times last week wrote a nice piece on the student angle, which is essentially the disturbing fact that banks are abandoning less-profitable loans to community colleges and “less-selective” four-year schools.

But the lending angle particularly intrigues us, given its broad implications for how our government operates:

[T]he plan may have created—with the loan industry’s assent—a new model of bank-based student lending that looks very much like its direct-lending rival. By selling their loans directly to the government, the banks can now get badly needed cash to issue more loans. But in the long term, the banks would lose the profits they make by holding a loan and collecting years of interest payments and federal subsidies.

What does this mean?

Such a change could be a windfall for taxpayers and students if Congress recognizes this and adopts the idea on a large scale, says Donald M. Feuerstein, a former Education Department adviser who supports the concept. The government is paying subsidies on about $400-billion in loans issued through the bank-based system, Mr. Feuerstein says. If the government took ownership of all of those loans from the banks, he says, taxpayers and students would suddenly find themselves with billions of dollars a year that are now being paid to the banks.

Interesting reporting by the Chronicle that shows how desperate banks are damaging their long-term prospects in order to stay afloat now.

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Elinore Longobardi is a Fellow and staff writer of The Audit, the business-press section of Columbia Journalism Review.