Big Lending Speaks

Today’s Washington Post business section has a front-page article discussing big lending’s efforts to fend off proposed cuts to student loan subsidies. Two thoughts:

First, Sallie Mae and its fellow big-lenders need to move on from trying to sway policy through lobbying pushes, public relations campaigns, and campaign contributions. Instead, it’s time they propose some policy solutions they would be willing to accept—solutions other than maintaining the status quo. There are already ideas out there for market-based methods to establish subsidy rates—for one example, check out New America’s loan auctions idea. Lenders will be better served in the long run by helping to design a system that allows market-forces instead of politics to establish subsidy levels.*

Second, let’s embrace the current dual-program structure rather than continue the endless back-and-forth between proponents of Direct Lending (in which the federal government provides loans to students directly) and the Federal Family Education Loan Program (in which private banks make loans to students, and the federal government subsidizes those loans). Granted, this dual-program structure is unusual, but the tension between the two programs is likely the best method of ensuring both are efficient, effective, and innovative. If either fails in one of those criteria, there will be lots of people calling for its removal, and another program ready and willing to take its place—that’s good motivation to stay competitive.

I’m happy to see this kind critical discussion of the federal student loan market. Keeping both private lenders and the federal government on their toes will help to create a student loan program that serves both students and taxpayers well.

*Any good policy will balance the need for low subsidy levels with the need to keep smaller lenders in the student loan industry. Loan giants, like Sallie Mae, will be at a huge competitive advantage in any market system, and without special consideration for smaller lenders, a market-based policy risks pushing small banks out of the student loan industry. This would reduce options for students, and small, local banks that provide personal service are a great option to have. Also, industries that consist solely of corporate behemoths (think cell phones) generally don’t have five-star customer service.