Why the Student Loan Industry Needed Reform

Last week the House voted to reform the student loan business and help more Michigan residents to get the funding they need to go to college. The reforms save money by cutting out wasteful subsidies to banks and investing the money into students themselves through increased Pell Grants and funding for community colleges. In Michigan, this means $1.1 billion in new scholarship money over the next ten years and $2 billion for competitive community college grants.

Under the existing system private banks received a subsidy to make student loans. To ensure that rates could be kept low the government guaranteed the loan, meaning that even if the student defaulted the government would pay the bank back. There was no risk to the bank and no difference between the loan products offered by the various banks.  Taxpayers were paying banks to make loans, but the banks were not adding any value to the process.

The legislation says that the government will now provide student loans through the Direct Loan program, but maintain competition among private lenders and non-profits to provide customer service for student borrowers. By making the loans directly, the government is saving $61 billion over the next ten years. The legislation turns most of this money right back around to the students for scholarships and community college funding while also setting aside $10 billion for deficit reduction.

This commonsense reform was long overdue for our students, colleges, and long-term finances.