VOX: Counting on banks to protect students from predatory colleges is insane

Career College Central Summary:

  • If worst comes to worst and you can't pay back your debt, you can always declare bankruptcy. You'll have trouble getting a loan in the future, but you can move on with your life. Unless your debt is a student loan.
  • Megan McArdle, who once paid for a certificate from a for-profit college that turned out to be mostly useless, argues that should change — but that, in exchange, it should be harder to get a student loan.
  • The idea that student loan underwriting should be based, in part, on the track record of the program or college a student will attend isn't entirely new. And it makes some sense, because student loans don't have any collateral; they rely entirely on the promise that education will help you make enough to pay them back. It's why the federal government is supposed to kick colleges out of the student loan program if too many students don't pay back their loans.
  • But what McArdle proposes sounds like something much more radical: the end of the federal student loan program as we know it.
  • Direct lending by the federal government has cut costs
  • Until 2010, private banks made most federal student loans. The loans were guaranteed by the government to create lower interest rates than were available in the private lending market, and the banks got to take some profit for their trouble. It was a very good deal for companies like Sallie Mae: they got the governmental subsidies for making the loans but assumed little risk if the loans weren't paid back.
  • That ended in 2010, when Congress reformed the student loan program with the same legislation that created Obamacare. The Education Department became the only student lender.
  • Because making the loans directly is cheaper for the federal government, and because the switch to direct lending was fairly smooth, there haven't been many proposals to put the federal program back in the hands of banks.
  • But banks aren't banned from making student loans on their own, and they do — about $6 billion worth in the 2012 academic year. Private loans, though, don't have the generous income-based repayment and forgiveness options that federal loans do, and they typically have higher interest rates.
  • Letting banks decide who should get a student loan, and making them assume responsibility for losses if the loans aren't paid back, would essentially end the federal student loan program, even if the federal government partially guarantees the loans in order to keep the interest rate artificially low. But it's not clear that it would do much to fix the real problem of students taking on debt they can't pay back.

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