The Magazine

The Coming Student Loan Debacle

From The Scrapbook.

Jul 19, 2010, Vol. 15, No. 41
Widget tooltip
Single Page Print Larger Text Smaller Text Alerts

The Scrapbook was not a huge fan of the federally subsidized student loan system that got replaced by the Obama administration and the Democratic Congress along with their takeover of the health care system earlier this year.

The Coming Student Loan Debacle

Photo Credit: Thomas Fluharty

Under the system in place since the mid-1960s, private lenders competed for the right to originate and service the loans; interest rates were subsidized and fixed by law; and the government stepped in to make up the losses when Joey and Phoebe Graduate failed to earn enough with their Therapeutic Dance degrees to make their loan payments down the road. The banks were guaranteed a profit, but not too much of one. If their borrowing costs fell far enough, they had to kick back some of their earnings to the feds.

All in all, it was a very unlovely system, the most noxious kind of big government/big business corporatism​—and one that came with a toxic side-effect. Just as cheap, subsidized mortgages led to a price bubble in the housing market, subsidized student loans had the effect of inflating the price of higher education (one of the last, great unpopped bubbles in our economy, by the way). University administrators could raise tuition and room and board with impunity, secure in the knowledge that the government would be subsidizing their customers. 

H. L. Mencken defined Puritanism (unfairly but memorably) as “the haunting fear that someone, somewhere, may be happy.” Obama Democrats are afflicted with Money Puritanism: the haunting fear that someone, somewhere, may be making a profit. In the case of their student loan “reform,” that someone was the private lenders, who are henceforth to be replaced by the Department of Education, which will now make the loans directly to borrowers. By eliminating the profits of the middle man, the idea was, federal funds could be freed up for more subsidies to the students—i.e., to the colleges and universities (more inflation!). What could possibly go wrong?

Well, a year ago, owing to its deep paternal devotion to Scrapbook Jr., The Scrapbook applied for financial aid at a fine public university, and in the process procured a small student loan from a private lender. The worst part of that process by far? Filling out online a form known as FAFSA, aka the Free Application for Federal Student Aid. And who is the bureaucratic progenitor of the FAFSA? Why, none other than the U.S. Department of Education, the new monopoly provider of federal student loans. (Never trust a federal program with the word “free” in its title: Navigating that FAFSA website cost The Scrapbook many hours that we will never get back.) So, the new Obama student loan system will be brought to you by the same folks who run the FAFSA. Wonderful.

Given all of this, we were unsurprised to receive an informational email last week from the associate provost for enrollment at Scrapbook Jr.’s university, warning of a few possible headaches from the new system:

Dear Student, 

As a result of the passage of the Health Care and Education Reconciliation Act of 2010, we must implement the federal government’s Direct Loan Program beginning with summer session 2010. .  .  . You may have questions or concerns about the changes and what this will mean for you as a borrower. Please review the attached Direct Loan Frequently Asked Questions for some answers to commonly asked questions about Direct Loans. 

What does this change mean for you? 

We’ll give you a hint: more FAFSA-style pain. Here are a few of the highlights: 

♦ You will no longer select a lender or bank for federal student loans as you have in the past; the lender will now be the federal government 

 ♦ Returning borrowers MUST sign a new Master Promissory Note (MPN) through Direct Loans for each loan type that they wish to borrow 

 ♦ Parents wishing to borrow a PLUS loan will need to seek credit approval and sign a new Promissory Note for the PLUS loan through the Direct Loan program 

 ♦ Returning Stafford, PLUS and Grad PLUS borrowers will have loans through the FFEL (Federal Family Education Loan) and Direct Loan programs. This will likely result in different servicers in repayment. Please become familiar with accessing your record in the National Student Loan Data System (NSLDS) at prior to entering repayment so that you are aware of where to make your payments. 

Recent Blog Posts

The Weekly Standard Archives

Browse 19 Years of the Weekly Standard

Old covers