Subsidizing Students, Not Sallie Mae

James Surowiecki has an excellent finance column in this week’s New Yorker that drives home the message of one of our Countdown to Change campaign issues: that students, not banks, should be benefiting from government help for education. From The New Yorker:

[...] For decades, student-loan companies have had one of the cushiest businesses in America. We want college students to be able to finance their education at reasonable rates. But banks are understandably leery of lending to people with no collateral and uncertain future earnings. So we provide incentives to lend. The federal government, for instance, guarantees the so-called Stafford loans that college students get: if a student defaults, the government will pay off almost the entire loan. On top of that, the government hands out billions of dollars in subsidies to lenders every year, all but insuring them a steady profit. In effect, lenders get a guaranteed return with very little risk.

This convoluted process is good at making student-loan companies rich—Sallie Mae, the biggest issuer of student loans, earned $1.3 billion last year, with a return on equity that dwarfs most other companies’. But it’s not very good at getting government money to students cheaply and efficiently. President Bush’s 2007 budget shows, for instance, that it’s four times as expensive for the government to subsidize and guarantee private loans as for it to issue those loans itself. In other words, the current system is not just corrupt. It’s also inefficient. So why are we stuck with it? [full text]

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One response

  1. Did you hear that, all you free-market acolytes?

    The privately-operated loan market is 4 times more expensive AND less efficient.

    There are lots of things that gov’t can do waaaaaayyyyy better than private industry.

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