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Behind all of the healthcare debates and save-face moments lies another policy proposal that is quietly making its way through the House. The Obama administration is proposing to increase its current 20% share of the student-loan origination market to 80% by July 1, 2010 and letting the remaining public sector 20% just fade away.

For decades, federally backed student loans were the most common way to borrow for college. Money was raised in the private sector, loans made and the private institutions paid a fee to the government for each loan. In return, the government covered most of the defaults which in turn, allowed the private lenders to make a regulated return. All of that changed in 2007 when Congress legislated a return so low that no private lender could make a profit holding the assets.

The administration is claiming that this will save $87 billion but there are discrepancies that the Congressional Budget Office says really only mean $47 billion in savings. Long story short, be prepared for the default rates to skyrocket and for more students to suffer as they come out of college and realize missing a single payment could cost them dearly.

Education for all! [that can afford it]

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  1. Jeff #
    September 17, 2009

    Why no mention of the subsidy provided by the federal government for student loans? You state that the banks raise money in the private sector to lend to students, but student loans are heavily subsidized by the U.S. government (in addition to the guarantee for defaults). Basically, the government gives money to the banks to lend to students under a government guarantee on terms dictated by the government. What value are the banks providing by administering the program? If the federal government can save money by cutting out the middleman, why not?

    Also, why do you expect default rates to skyrocket?

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