Move Towards Student Loan Privatization

Published September 23, 2008

Dear Editor:

In response to the credit crisis, Congress authorized the Department of Education to purchase loans from lenders participating in the Federal Family Education Loans program (FFELP) if they become unable to meet the demand for capital in the weak economy (“Congress helps ensure student-loan availability,” September 23).

It is easy to attempt to solve a problem by throwing more money at it, but rarely is that the right solution. Unfortunately, the government is taking just that approach by bailing out private lenders.

The student loan industry’s reliance on government aid distorts the student loan market and ultimately encourages poor investment habits, stifles financial innovation, and discourages prudent long-term planning for lenders and borrowers alike. This leads to one of the great tragedies affecting higher education today, the overpricing of an education that carries less and less value.

The need for the bailout may be overstated, despite the recent difficulties of the current crisis. Total borrowing through private student loan companies grew by almost 900 percent over the past 10 years. Moving away from government subsidies under FFELP and towards true privatization is a step in the right direction.

Matthew Glans ([email protected]) is a legislative specialist for The Heartland Institute.