Financial Aid and the Feds

It’s not often that the federal gravy train stops to pick up college students in a high-profile way. Those benefits usually go to populations that vote in higher numbers. But President Obama and Democrats in Congress have recently been pushing for a formal takeover of the student-loan industry. The Editorial Board made its case in support of the plan on Feb 17.

The Student Aid and Financial Responsibility Act (SAFRA) is in some ways a step forward on making higher education affordable, but it’s also a step back on the more important question of government’s role. In other words, we’re trying to fix one problem (a troubled financial aid system) but are worsening another one (Uncle Sam’s maxed-out credit card).

The idea of SAFRA is to streamline an unwieldy process called the Federal Family Education Loan Program (FFEL). Under FFEL, the federal government guarantees loans through private lenders. The new plan would take that market and fold it into another program of direct loans, helpfully called Direct Loan. Incidentally, Direct Loan is a blatant violation of federal rules requiring complicated and confusing names.

The bill’s supporters point to $80 billion in savings, which President Obama has linked to the effort to “cut out the middle man — the banks — and lend directly to the students.” The logic is that there’s no added profiteering or corruption from Bill the Banker. Plus, supporters point out, the federal government is already backing the loans anyway. Part of the savings will also go to the Pell Grant program.

At first, the new plan seems like a win-win. The default rates in the Direct Loan program are significantly lower than the default rates in FFEL. Perhaps something is working better in the Direct Loan program, one might argue. In any event, it would streamline a process noted for inefficiency.

The plan would also reinforce America’s meritocracy. The most talented students ought to be able to live comfortably and make a mark on society regardless of their parents’ income. Right now, college is a stepping-stone. If we remove that stepping-stone, it would be even harder for people to become better off than their parents were.

The problem is, further nationalizing the student-loan system carries three risks. First, a practical one. There’s a reason that the federal government has a reputation for confusing forms, less-than-cordial customer service and often-frustrating outcomes: You can’t take your business elsewhere or even withhold payment (read: taxes). The incentives to cut costs just don’t translate from private industry to government, and corruption can thrive when no one needs to turn a profit. Most of all, Washington doesn’t have the best track record with politically controlled loans. There is a risk that SAFRA could make the loan market worse off, rather than better.

Second, a mathematical one. According to The Wall Street Journal, Congressional Budget Office Director Douglas Elmendorf actually puts the savings at only $47 billion. Part of the question rests on what the default rate will turn out to be. It might be that FFEL students were riskier loans, and nothing about the Direct Loan program actually lowers default rates. In that case, the cost of defaults would not decrease. These rates are trending upward in both programs, so the objection is fair.

Most convincing, though, is a philosophical danger. It can be argued that the government may have a justifiable role in the economy where the private sector is failing to meet a need. But the government’s proper role is not to keep all of its citizens on the dole. Alexis de Tocqueville brilliantly grasped the risks of such a system spiraling into despotism.

The overblown bureaucracy in Washington sustains itself with handouts, and to cut the giant back to a healthier size, we must impartially examine every program on its merits. That should begin with those that most directly affect us. In this case, the government may have to play a large role in meeting the need for financial aid for years to come. But we shouldn’t journey too far or too fast down that road without first considering all of the other alternatives. Thankfully, our Senate is uniquely able to throw on the brakes when legislation is traveling too quickly.

Ultimately, the bigger question is one of a different kind of loan, which our generation will be forced to pay many years after we reap the benefits: treasury securities. Even though Washington can write off student-loan defaults, the pied piper will eventually come calling for the town’s children — us — if our government continues to take on more and more liabilities.

Brian Lipshutz is a sophomore from Lafayette Hill, Pa. He can be reached at lipshutz@princeton.edu.