Student loans are understandably a red-hot topic these days. Tuition is expensive and student debt just hit a record high. In turn, borrowers want nothing more than to know how they can repay their loans most efficiently. One concept that has been floating around that we’re wholeheartedly in favor of is privatizing student loan management. What does that actually mean, and how would it benefit students, schools, and school districts? So, let’s level with everyone in plain English.
What's the Deal with Privatizing Student Loans?
In plain terms, privatizing student loan management means putting private companies in charge of overseeing and managing student loans. Currently the federal government owns and administers the majority of student loans. Many others believe the job would be better left to private industry. There are two main ways this could happen:
Eliminate government lending: Stop offering new loans through existing government programs.
Replace government lending: Create a marketplace where private companies offer loans instead of the government.
Why Consider Privatization?
The name of the privatization game is supposed to be saving taxpayer dollars and increasing efficiency. Many critics argue that the government just can’t do loans well. They further claim that private companies, due to their added expertise and resources, could do them a lot better.
The Federal Family Education Loan (FFEL) program is an example of what happens when government lending and private lending are combined. Instead, it produced a muddled mashup of the bad of each, producing layers of corruption, inefficiency and delays.
Potential Benefits of Privatization
Reduced taxpayer burden: If private companies manage loans more efficiently, it could save taxpayers money.
Increased innovation: Private companies might come up with new and better ways to manage loans, making the process easier for students.
More tailored solutions: Private lenders might be able to offer more personalized loan options based on a student's individual needs.
The Potential Downsides
There are downsides to privatizing student loan management, too. One of the gripes is that private companies are incentivized by profit. This could lead to:
Higher interest rates: Private lenders might charge higher interest rates to make more money, increasing the overall cost of borrowing for students.
Stricter repayment terms: Private lenders might have less flexible repayment options, making it harder for students to manage their debt.
Less access for high-risk borrowers: Private lenders might be less willing to lend to students who are seen as high-risk, such as those with low credit scores or who are attending less prestigious schools.
There are two areas where the foundation for private student lending could use reinforcement.
Costs on taxpayers: Loan guarantees impose costs on taxpayers.
The Impact on Students
Privatization would be an enormous change for students, creating great opportunity but potentially causing serious harm. On the one hand, it could result in wider availability of more innovative loan products and more effective, personalized customer service. Or, on balance, make loans more expensive and less accessible for students who need them most.
Just one change in repayment has enough power to save you thousands on your student loans. Recent proposals to expand student loan forgiveness have been hugely influential. If programs like the Biden administration's SAVE Plan are eliminated, the cost of student lending could revert to previous levels.
The Impact on Educational Institutions
Increased privatization would have disastrous implications for educational institutions. If students experience reduced access to loans or incur higher costs of borrowing, this might increase student enrollment. This would be especially devastating to those smaller or less prestigious schools that need more revenue from tuition.
The Government's Role
The government has long played a dominant role in student lending. This change created a permanent, government-as-lender system that served as an alternative to the original FFEL system. In 2010, the Obama administration blew up the original system entirely. This change was an important step to make student loans more accessible and affordable.
Current Government Programs
Direct Loans: Loans made directly by the U.S. Department of Education.
Federal Perkins Loans: Low-interest loans for students with exceptional financial need (though this program is phasing out).
PLUS Loans: Loans available to graduate students and parents of dependent undergraduate students.
The Cost of Government Lending
Forgiving all federal student loans would cost $212 billion over the next 10 years, according to a new … Because of current Congressional Budget Office (CBO) scoring rules, it would instead count as costing $55 billion. This illustrates the risks of losing money by upending the status quo. Removing all grad and parent lending would save $89 billion.
SAVE Plan as the new default IDR plan that will lower many borrowers’ monthly payments to just 5% of their discretionary income. If a court ruling or the new administration does away with the SAVE Plan, much of these savings will be lost. That’s because the government-as-lender system won’t deliver those fiscal magic tricks anymore.
Making the Switch
There are two main ways to switch from government to private lending:
Eliminate new lending: Stop offering new loans under existing government programs.
- Replace government lending: Create a marketplace of private lending for future loans.
Potential Savings
As courts continue to fight those changes and new regulations come down the pike, the savings from making the switch could evaporate. Congress will have to act fast to take advantage of this opportunity.
Risks to Consider
Higher borrowing costs: Private lenders may charge higher interest rates than the government.
Reduced access for some borrowers: Private lenders may be less willing to lend to high-risk borrowers.
Less flexible repayment options: Private lenders may offer less flexible repayment options than the government.
Conclusion
The issues surrounding the ongoing debate over the privatization of the management of student loans are complicated and multi-layered. The upside is huge, from less burden on the taxpayer to greater innovation. There are cons, including increased borrowing costs and less access for certain borrowers.
Key Considerations
The impact on students: How would privatization affect access to loans and the cost of borrowing?
The impact on educational institutions: How would privatization affect enrollment rates and tuition revenue?
What role should the government play in student lending?
Final Thoughts
Ultimately, this debate about whether or not to privatize student loan management is a political one. Instead it takes an honest assessment of the pros and cons and an honest reflection about what society values and prioritizes. As good students and smart taxpayers, we must all pay close attention and actively participate in this critical discussion.
