Nexus: Chapman's Journal of Law and Public Policy

On Thursday, September 17, the United States House of Representative passed the Student Aid and Financial Responsibility Act. If a final version of the bill is ratified by Congress and signed by the president, the bill would completely overhaul current student lending practices by allowing the government to lend to students directly instead of subsidizing private loans.

Though reform had been suggested in the past, little weight was ever given to such a dramatic student-lending overhaul until liquidity all but vanished and jobs rapidly disappeared, leaving would be student-borrowers with a two-pronged problem: Students find it increasingly difficult to obtain loans and are unable to gain employment in order to begin paying off student loans after graduation.

The first prong presents clear-cut problems. Without loan money, the average college student is simply unable to finance the high costs of attending college. The second prong is crippling in a more complex way. With liquidity already dry, the prospect of loaning money to prospectively unemployed young adults is not the type of risky lending practice banks are willing to get involved in, especially after the subprime mortgage debacle which, in many ways, led to a banking industry flatline.

So why may this bill face serious opposition in the Senate? The benefits of a direct government student-lending program are obvious. By cutting out the middleman private lender, students will save money by avoiding fees from private lenders and gaining lower interest rates under the government loans. Additionally, government backed loans would be insulated from dramatic market swings and would be guaranteed in any economy.

Yet, during a time when the government is becoming increasingly prominent in many aspects of American life (e.g., proposed government-backed health care reform, enormous stimulus packages, increased taxes on select tax brackets, and TARP funds just to name a few programs) are we really ready for a government take-over of the student lending practice? While some argue that the market should take its course, others might suggest that the passage of this bill would be one of the most dynamic reforms in American history.

References:

http://edlabor.house.gov/blog/2009/07/student-aid-and-fiscal-respons.shtml http://edlabor.house.gov/blog/2009/07/safra-reliable-affordable-coll.shtml