Education & Academia

Obama’s Student-Loan Takeover

Obama’s healthcare “reform” legislation included a federal takeover of the college student-loan business. 

Obama touted this aspect of “reform” as a way to save $68 billion over the next 11 years. The savings would go to pay for expanded Pell Grants for low-income students and to help low-income graduates pay back their student loans.

But more is going on here than the standard Obama redistributionist impulse. Student loans have become a weapon to attack and control private colleges.



Federal government involvement in student loans dates from the Higher Education Act of 1965. Federal interest-rate subsidies made loans to “qualifying” students more affordable. The loan-subsidy program was expanded in 1972 with congressional authorization of “Sallie Mae,” a government-sponsored enterprise that subsidized private-bank originated student loans.

Through Sallie Mae, politicians targeted different groups and various areas for special treatment in the name of “fairness.”

The presence of increasing federal subsidies allowed colleges and universities to dramatically raise their tuition, “fees,” and other student costs in a cost/debt death spiral that left too many college grads with six- digit debts at the beginning of their post-college careers.



Over the years, attempts to control escalating program costs and student debt through privatization didn’t work.

Rather than dismantling the federal-loan program in favor of truly private-sector solutions, in 2004 Salle Mae was spun off as a private corporation (SLM Corp) which still counted the bulk of its “business” administrating the Federal Family Education Loan Program through private banks.

For Obama, the evil in this program was the “profit” the private banks made originating these subsidized and guaranteed loans.

Last month, the federal subsidy program ceased and the direct federal-lending program took over. SLM Corp was left with $145 billion in loan guarantees that included a substantial portion of non-paying borrowers—students who, on graduation, remained unemployed or underemployed during the recession.

Once again, federal intrusion into a private relationship (student and college), undertaken for the noblest motives (expand college opportunities for deserving, but poor, students) left students with crushing debt, colleges with budget dependence on the government, and private investors and taxpayers picking up the mounting losses.

Within days of the federal takeover of the student loan program, this dysfunctional picture got worse.

Obama attacked private for-profit colleges like the University of Phoenix.

There are 14 of these publicly traded private colleges in the U.S., enrolling about 1.4 million students. These private largely non-union colleges provide instruction connected to jobs and careers, using the best technology available, and flexible hours, to allow students to work and learn at the same time. Enrollment is booming as unemployed and underemployed folks seek new training and skills.

Students attending these private colleges are eligible for federal student loans. In Obama’s world, this is an intolerable subsidy of the college’s profits.

In a study released this week, the Senate Committee on Health, Education, Labor, and Pensions criticized these colleges for the profit they make, alleging that tuition is higher, student loans larger, and defaults on those loans twice those of public colleges.


The report also charges that students drop out at higher rates, are not properly supervised, and take classes that are not accredited.

The report states that 30% of students from these for-profit colleges have defaulted on their student loans since 1995, as compared with just 15% of public-college students.

The Obama Department of Education moved last Friday to cut off student loans to private colleges where a too-high proportion of the students fail to repay their loans.

Sen. Tom Harkin (D.-Iowa) called for even more stringent federal control of private colleges to ensure that “tax dollars are not wasted and students are not cheated”.

This entire attack is bogus. Here at last—transparency in the Obama regime. A transparent power grab.



Tuition is higher at private colleges because “tuition” at public colleges is heavily subsidized by taxpayers to start with. Therefore, student loans are larger at these private colleges to cover the real cost of the education. The truth is that tuition at these private colleges is much lower than the true cost of public colleges when you add the “tuition” and the taxpayer subsidies.

The default rate for private-college students is also higher because these private colleges are providing the flexible, technical education to minority and poorer students that public colleges refuse to do.

In private colleges, you work on your schedule, at your pace, using the computer with much less (if any) class time. Many of these students “drop out” short of a degree to gain a job when their skill level is high enough. By contrast, public union-run colleges still make students work to the college schedule in centralized campuses with high costs.

As in all such comparisons, in the private sector the consumer is king. In the public sector, the government is king.

Obama has stated a goal of doubling the number of college grads by 2020. With public-college budgets stretched thin, forcing tuition and fees to escalate, no amount of federal-loan infusion will reach this goal.

Attacking the private colleges and muscling them with federal-loan threats and federal Education Department rules makes reaching the goal of more college grads that much harder. And how is attacking the really effective way to get the unemployed retrained going to help get us out of this recession?

With Obama, it seems that the soaring rhetoric full of lofty goals is a smoke screen hiding the real agenda of replacing private business solutions with more federal programs at a higher cost.

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