Last week, President Barack Obama demonstrated his commitment to providing affordable higher education to all students. He put forth an ambitious proposal to Congress that will cut funding to private lenders and redirect the money to Pell Grants for students in need. This is a great way to provide additional money to students who are having trouble paying for college in the current economy. While this proposal may leave students who rely on loans at a disadvantage, the government could mitigate this effect by offering risk-free loans to college students directly instead of working through private companies. Congress should consider this solution to simultaneously offer Pell Grants and affordable loans to students who need them.
Today, President Barack Obama is moving toward such a system. According to the proposal, $94 billion will be saved over the next 10 years by eliminating subsidized loans from private banks and replacing them with direct government lending. The extra money saved from cutting the subsidies to private lenders will also go to Pell Grants. This means that the profits that would have been collected by private lenders will essentially be redirected to fund aid programs for college students.
It’s important that the federal government takes a strong initiative to create funds for students. This money — taken from the profits of private loan companies — is better spent on making higher education affordable for struggling students in a failing economy. The proposal puts the focus back on what’s best for students who otherwise wouldn’t be able to afford college.
Despite these advantages, there is some worry that students who don’t qualify for Pell Grants and instead use loans to pay for college will lose out. For decades, private lenders have heavily relied on up to 97 percent guaranteed repayment from the government on these loans, accustoming them to a risk-free process. Ending the government subsidies could cause private lenders to drastically raise interest rates. This could potentially pose a problem for students who don’t qualify for grants but rely heavily on loans, because the private lenders need to make up for lost revenue. It could also limit loan availability, since private lenders may be more selective in choosing loan recipients.
The solution is to bring the federal government to the forefront of all student aid programs. Instead of the government paying lenders like Citigroup, Sallie Mae or Bank of America to loan money to students for profit, the federal government could take the role of a main resource for students in need of a loan at a fixed, affordable interest rate. Such an idea surfaced during the Clinton days but didn’t make it past Congress. It’s time to revisit this loan plan, eliminating the middle-man and making the loan process more affordable and reliable for students who will not qualify for the increased amount of Pell Grants.
Congress should consider this plan as the best way to provide students with the financial aid they need for college.