National Debt Clock

Wednesday, January 20, 2010

Obama to Nationalize Student Lending with Pending Budget Bill

http://cnsnews.com/news/article/60074

A bill currently before the Senate would empower the Obama administration to nationalize the student lending industry, eliminating the federally subsidized private loans millions of university students rely on to finance their educations.

Under the current system, the federal government subsidizes private financial institutions in order to entice those institutions to provide low-interest loans to students.

Under this arrangement the government sets the interest rates lenders may charge students. In return, the government reimburses lenders if market interest rates rise above the interest rates on the loans – in essence, the government reimburses private lenders if they begin losing money on the loans.

In return, the lenders agree to return any windfall profits made from the loans to the government. In other words, if market interest rates fall below the interest rates of the loans, the lenders pay the government the difference.

The government also agrees to reimburse the lenders should a student default.

Under the system proposed by Obama, the government would cut private lenders out of the picture entirely, setting the interest rates and collecting payments directly for all student lending.

Whether or not the government saw a profit or a loss from the new, federal loans would depend on the rate at which the government borrows money. For instance, the law currently sets the interest rate for direct loans at a maximum of 6.8 percent.

Under Obama’s proposal, if the government can borrow money at a rate lower than 6.8 percent, it would realize the difference as profit. If the government’s borrowing rate were to fall in the future, its profit on student loans would grow.

The idea to nationalize student lending was first put forth in President Obama’s fiscal-year 2010 budget and marketed as a way to save the government billions of dollars. According to a CBO estimate, the proposal would save the government $87 billion over 10 years.

The savings estimate results from the fact that the government believes it will collect more in interest payments from students than it would otherwise have to pay in fees to lenders.

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