Point of View

Private loans = better options

February 11, 2010 

— I have just retired after almost 35 years as Duke University's director of financial aid. I remain keenly interested in the landmark debate over college loans now making its way through Congress. The result of this debate could radically change the way students obtain loans for college.

The Obama administration has proposed to eliminate all private student lenders and make the federal government solely responsible for the management, processing and timely delivery of all student loans via the Federal Direct Loan Program. This would be a very serious mistake.

In a perfect world, students and parents would not be required to borrow to achieve their educational dreams. Since we do not live in a perfect world, immediate and affordable access to student loans will remain a critical aspect of our students' ability to support their educational goals.

I believe that it is critical for private lenders, including state lending agencies, banks and approved private companies, to have an important role in providing students with a variety of common sense options when borrowing for college.

First and foremost, eliminating private lending will cost students money. As currently configured, student lending is a competitive market, and private lenders compete on price and service. Over time this has saved borrowers money by reducing their costs of borrowing and, therefore, their debt upon graduation.

Second, in a market in which the federal government is the only lender, eliminating competition will lead to a reduction in services to students. In a competitive loan market, students can choose a lender based on price and the lenders' array of services. Should the federal government become the only lender, students will lose these options.

Not only will students be disadvantaged by the elimination of private lending, colleges and universities will be as well. Should the federal government become the only source of loans, institutions will be required to set up administrative structures to manage these programs locally. These services and the associated costs are now covered by private lenders. As campus costs increase, so will tuition.

The elimination of private lending will also have an effect on the federal deficit. Private lenders now provide the resources required to originate and disburse student loans. If private lenders are eliminated, all necessary loan resources will have to be provided by the government. Given the recent and alarming increase in the federal budget deficit, the additional deficit increase that will be caused by the Obama proposal can and should be avoided.

Finally, eliminating private lenders will put an end to innovation in the marketplace. Much in the way that maintaining these qualities are crucial in the health care sector, they are equally imperative in the student loan industry.

Private lenders driven by marginal profit opportunities have worked over time with institutions to create new and innovative lending programs. At Duke, students and their parents benefited from two such programs. This kind of innovation will not be available in a market controlled solely by the Department of Education. This is evidenced by the fact that institutional participation in the Direct or Federal Lending Program dropped over time from a high of 40 percent to almost 20 percent nationally. Institutions chose to move to private lending because of the services and savings provided to students.

For students in North Carolina and around the nation, it is crucial that our U.S. senators vote to maintain the private lending option. Students and parents will benefit from the preservation of this vital program.

James A. Belvin Jr. is former director of financial aid at Duke University.

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