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Gail Collins on the Epicenter of Student Loan Strangeness

May 28, 2009

During the campaign, President Obama called for the end of the federally guaranteed student loan program.  He suggested that all student loans should be issued through the Direct Loan program instead.  Why, you might ask?  Here is Gail Collins’ (columnist for the New York Times) explanation of the federally guaranteed program, which she calls the “epicenter of student loan strangeness”:

This is a system that goes something like this:

We the taxpayers pay the banks to make loans to students.

We the taxpayers then guarantee the loans so the banks won’t lose money if the students don’t pay.

We the taxpayers then buy back the loans from the banks so they can make more loans to students, for which we will then pay them more rewards.

Are you with me so far? Wait, I see a hand waving back there. What’s that, sir? You want to know why the government doesn’t just lend the money out itself? Excellent question!

Under the Direct program, the government does just lend the money out itself.  (The lingo on student loans can be a little confusing – for a breakdown of what’s what, click here.)

Eliminating the federally guaranteed program would save taxpayers $94 billion over the next ten years.  Even so, members of Congress like Senator Nelson (D, NE) defend it.  Collins notes the presence of a large lender in Nebraska which benefits from the program, however, she also notes that under the Obama plan many of the office jobs the lender provides would not be eliminated.  So why Nelson’s opposition?  Well, it seems the Obama plan would do away with some of the most well-paid positions, cushy jobs the lender provides.   Strangeness, indeed.

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