Just like healthcare, the cost of higher education has increased beyond the reach of those who must pay for the critical services. It’s hard to pinpoint why the cost of higher education continues to escalate far in excess of normal inflation. But, a break from the never ending increases is a welcome event to millions of struggling students and their families.
The recent decision by the Federal government to eliminate the middle man from student lending programs may prove to be historic. The logic for this policy shift is simple. For years, student loan programs were run, supported, funded and insured by the government, but the banks were the official lending institution. It was a pretty sweet deal for the bankers who pulled in lucrative profits, but had little risk exposure. Essentially, the money brokers raked in profits from the majority of students who paid their loans, but passed off the deadbeats to the government under a cozy arrangement.
It does not take a genius to recognize the immediate cost savings that result from the government cutting out the banks. No middle man translates to lower interest rates which lead to lower payments which results in greater affordability which means fewer defaults which makes more money available for more students. It’s a win-win situation for the students, our government and our economy. The only apparent losers are the banks who have lost their exclusive access to the education money pit.
Why has this monumental hole not been closed earlier? It seems financial institutions have a long history of making money with other people’s money while passing off the risk of doing business to the government. As a result of this comfy situation, the government has enacted guarantees such as the FDIC to protect depositors and the economy from the frequent missteps of the middleman brokers.
Today, the government produces dollars for the banks at interest rates close to zero. The banks then pass the money off to consumers who are forced to pay interest rates of 5 to 25 percent for the privilege of borrowing the money from the middle man. The banks make immense profits until they inevitably get greedy. And when these banks screw up and threaten the viability of our entire economy, the government feels obligated to save them with trillions of free dollars because they have become “too big to fail”.
It seems our government can eliminate the entire private banking system. Hopefully, the government takeover of the student loan program is a first step in abolishing this archaic scheme. It does not make economic sense for our government to produce, distribute and guarantee dollars for banks that have so frequently failed the American people and endangered our way of life.