As Academia Slept...the Government Took Over

The dearth of media coverage regarding the federal takeover of the federally funded student loan program (i.e. Sallie Mae) and the elimination of private lending via the Federal Family Education Loan (FFEL) program, is astounding. Americans were caught off-guard, when the political debate seemed to be about healthcare. After the fact, most assumed it was Washington padding the bill to make the healthcare numbers look more favorable.

With the government now the only lender to students, do you believe tuition increases will be permitted to continue unabated? "The National Association of Independent Colleges and Universities (NAICU), says...the average annual increase in tuition and fees has been 6 percent over the last 10 years... Do the math and you'll see that an average annual increase of 6% leads to an 80% rise in tuition costs over just one decade!" [Money and Markets and Federal Reserve Bank of St. Louis]

Our government is already in hoc up to its proverbial eyeballs to foreign debtors and in danger of losing its triple AAA credit rating. Why would it choose to take on more long-term debt, especially with student loan default rates reaching a nine year high of 6.5%? Defaults typically increase in tough economic times; consider the last recession, in 1989, when default rates reached 22%. Given that less foreign creditors are showing up at Treasury Department auctions, and the Federal Reserve is now monetizing the debt (buying unsold Treasuries at auction) -  Why would the government choose to become the sole provider of funds for federal loans [Stafford and PLUS] at this time?

With money tight in the public sector and credit tight in the private sector, wouldn't it make better sense to reform the interest subsidy and loan guarantee process to guarantee more loans for less money ( paying only on the unrecoverable amount of the defaulted loans), Rather than tie up money directly laying out the entire sum of the loan? After all, we do not have a sovereign wealth fund with money lying around to invest, as some countries do.

Given that all federal student loans will be subject to and administered by the Department of Education, which is funded at Congress' discretion, and given this Congress' track record for deal making - do you believe that these will continue to be distributed without favoritism to all those in need? As money gets tighter, will some states receive preferential treatment? Will the alma maters of certain politicians receive favoritism? Will certain degree programs receive preference? Where will osteopathic medical schools fall in this mix? Will physicians receive less favorable terms going forward if they are training in specialties or geographic areas which are not deemed shortage areas? What happens when the government decides to apply a Sustainable Growth Rate (SGR) formula to tuitions because there is not enough money to go around?

Given the current trends in Washington to "never let a crisis go to waste" - was this good economics, concern for students or control?

I invite your comments -