Tell me if this makes sense:
When private lenders got into the federal student loan business years ago, the federal government guaranteed that it would step in when student borrowers defaulted on their federal loans. The government (us taxpayers) also gave the student loan lenders a fat subsidy to participate in this virtually risk-free business.
You have no idea how sweet a deal this was, but let me help you wrap your mind around it: Between 1995 and 2006, the stock of Sallie Mae, the student loan goliath, soared by 1,400%. That’s not a typo. During five of those years, the guy at the Sallie Mae helm enjoyed a pay package of $235 million.
Thanks to powerful lobbyists and a compliant Congress, student lenders gained tremendous power over the years while the rights of student and parent borrowers nearly disappeared.
If you’re wondering why taxpayers got messed up in this kooky arrangement, you’ll cheer a momentous vote that occurred last week in Congress. A House bill, which I hope will be approved by the Senate, would make the federal government the sole provider of federal student loans. The legislation would also free up roughly $87 billion in private lender subsidies that could be used to increase federal financial aid and other good educational causes.
The federal government has been offering its own direct student loans for years, but many colleges turned to Sallie Mae and other outside lenders because of perks the private loan industry offered their campuses. I’ll let you know if the bill becomes law.
Further Reading:
Researching Student Loan Options
The Perils of Private Student Loans
Lynn O’Shaughnessy is the author of The College Solution.