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David H. Garrison: Government takeover of student loans is a bad idea

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An Arabian proverb says that "if the camel once gets his nose in a tent, his body will soon follow." The Obama administration certainly led with its nose with the $787 billion bailout of banks that were allegedly too big to fail, followed by its takeover of General Motors and its further attempts to nationalize health care. Next may be the Washington takeover of the $1 trillion student loan industry.

The administration is attempting to move the $1 trillion in student loans that will be made over the next decade to a program that will be solely and directly controlled by the federal government. Under the provisions of a new bill, private lenders would effectively be cut off from competing to originate student loans, as they have done since 1965.

This will result in the Department of Education becoming the fourth largest bank in the United States (based on assets) and the 21st in the world.

Although proponents claim billions of dollars of cost savings, the administration's savings calculations of $87 billion have been greatly overstated, according to the Congressional Budget Office. Taking into account the additional cost to the federal debt, administrative costs for the Department of Education to service 19 million student loans annually, and the incorrect calculations about market risk, this will lead to increased costs, not savings.

Since 1965, private lenders have competed for the student loan business under the Federal Family Education Loan Program. In 2009, the private loan providers will provide an estimated $65 billion in student loans, while the federal direct program will only provide $25 billion of the student loans.

Currently, universities and colleges have the option of using either the FFELP or the federal government direct student loan program. More than 75 percent of all universities and colleges use the private FFELP rather than the federal direct loans to supply loans to their students.

Universities believe the FFELP is a better choice than the federal government's direct loan program because of the great customer service universities and students receive. Students quickly know that they have the loans and the universities know they will get paid because the private lenders under the FFELP have four times the number of loan originating and servicing personnel as the federal government.

The proposal for the federal government to manage and control 100 percent of student loans is fundamentally flawed. Those whom it purports to help -- students, parents and universities -- will suffer without the same level of service for students' loans they have experienced in the past, leading to higher default rates for students and taxpayers.

At the same time the administration is talking about saving jobs through the stimulus, these private lenders could lose up to 35,000 jobs. This is the nearly the same number as all the jobs that the administration has said have been saved or created by the stimulus.

A broad coalition of nonprofit and for-profit private lenders have already suggested ways to save money without the need for another Washington takeover. The administration has ignored their offer. Is the real agenda federal control or savings for students?

The federal government must encourage our basic right to a free market by embracing competition and furthering a climate of innovation while protecting citizens. Eliminating competition and having the federal government control a whole industry does not accomplish that goal -- unless of course you are a camel with a very big nose.

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