It's one of President Obama's proudest achievements in education reform. And GOP challenger Mitt Romney is vowing to reverse it.
Saying the administration's move has contributed to rising student-loan default rates and increased exposure for U.S. taxpayers, the presumptive Republican nominee and former Massachusetts governor is proposing to repeal the law cutting private-sector banks out of the huge federal student-loan market.
"A Romney administration will embrace a private-sector role in providing information, financing and education itself, working with effective businesses to support the goals of students and their families," according to Mr. Romney's education-policy platform.
When Mr. Obama signed the legislation ending the role for private-sector banks in March 2010, administration officials claimed that cutting out the banks as "middlemen" could free up nearly $68 billion over the next 11 year for college loans and deficit reduction.
"For a long time, our student-loan program has worked for the banks and financial institutions," Mr. Obama said at the time. "Today, we're finally making our student-loan system work for students and all of our families."
But Mr. Romney's advisers say having students receive loans directly from the federal government, as called for under Mr. Obama's law, brings up new problems. His reforms, they say, will have the practical effect of encouraging vulnerable students to borrow more than they can afford with promises of debt forgiveness at the taxpayers' expense — a recipe for higher default rates.
Mr. Romney "is not interested in re-creating the previous program," said Scott Fleming, a member of Mr. Romney's education policy group. "He is simply looking for affordable and efficient alternatives to replace a system that relies exclusively on Treasury borrowing that leaves American taxpayers at risk for an increasing default rate."
Before the 2010 law, commercial banks and other private-sector lenders would issue federally guaranteed loans to prospective students, earning a servicing fee from the government. The Obama administration decided instead to have the Department of Education allocate the loans directly, removing the bank subsidy from the federal budget.
The Obama campaign argues that makes for a more efficient arrangement at a lower cost to taxpayers. The only special interest that benefits from a reversal in policy, they say, would be private-sector banks.
Romney advisers challenge the president's savings estimates, as well as his larger argument.
"The Obama administration has advertised this as a savings when in reality these loans are issued with Treasury debt that is not repaid until several years after they were issued. In addition, the administration has underestimated the true cost of the [direct loan program] by as much as 30 percent," said Mr. Fleming. He noted that the Department of Education is already contracting out their student-loan services to the same providers that participated in the previous program.
Patrick Callan, president of the Higher Education Policy Institute, thinks that the real problem is not with the administration's policy — which he says has been generally positive — but with the longer-term pressure on ever-rising tuition costs.
"This trend cannot be reversed simply by actions from the federal government," said Mr. Callan. "It requires an effort by any administration to bring the several states, governors, legislators and institutions of higher education together. They have the greatest control over higher education policy, and they must be engaged with in order to solve the real problem."
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