Direct college loans get welcome boost

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Alarm about ripple effects of the international credit crisis last week prompted Congress to approve and send to President Bush a bill aimed at ensuring that money would be available for college loans.

The measure is welcome enough. Better to take action now than wait too long. Students already are applying for student loans for next year.

But save your cheers for a more welcome development: the trend among universities toward direct loans from the government.

A variety of studies, including analyses from both the Government Accountability Office and the Office of Management and Budget, have shown that direct loans generally are a better deal for both students and taxpayers.

Fortunately for Nebraska students, the University of Nebraska-Lincoln has judiciously promoted direct loans under the leadership of Craig Munier, director of the office of scholarships and financial aid.

That’s not necessarily the case at all colleges and universities. Direct loans used to supply the needs of about a third of the student loan market. That has dropped over the past decade to about 20 percent.

That period coincided with an era of corruption in student loan practices that included private lenders plying college loan officers with golf outings and sailing trips.

Private lenders were able to exploit loopholes in the system to suck billions in profits away from taxpayers who subsidize the college loans.

It was a sweet deal until Congress enacted reforms last year. The lenders had both a subsidy and a guarantee that the loans would be repaid if a borrower defaulted. As Rep. Tom Petri put it, it was an arrangement that “no fiscal conservative or free-market supporter could justify…”

It was only a year ago that New York Attorney General Andrew Cuomo was turning up case after case of unsavory deal-making in which loan companies received favored treatment after university officials received inducements, such as being allowed to purchase stock in the companies at discounts.

Also enabling the spread of private lenders into the field was a law that prevented the U.S. Department of Education from promoting the direct lending program.

Now a report last week from Student Lending Analytics shows that 5.8 percent of colleges, including Michigan State and Penn State, are planning to switch to the federal direct loan program and another 19.3 are contemplating the switch.

U.S. Secretary of Education Margaret Spellings said last month that the direct loan program could be doubled without problem.

Continuation of the trend would be good for college students, their families and the taxpayers that are subsidizing the program.