Bailout Plan for Student Loan Companies Might Hurt Students

The government plans to help struggling student loan companies, announced U.S. Treasury Secretary Henry Paulson Wednesday. He said the decision would make more credit available to college students, but experts warn the plan might not help students at all.

“We are very wary of the government bailing out private student loan providers, many of whom engaged in predatory practices by pushing high-cost private loans on high-risk borrowers,” says Stephen Burd, senior fellow at the New America Foundation, a nonpartisan public policy think tank.

It might not be such a bad thing that struggling private loan companies aren’t lending to students anymore, Burd adds. “High-priced colleges and lenders have made it too easy for financially needy students to take on unmanageable levels of private loan debt,” he says.

Last month, Congress authorized more than $700 billion in public money be used to rescue banks Paulson said were on the brink of collapse largely because of the home foreclosure crisis.

In a televised news conference Wednesday, however, Paulson said the government is dropping its original plan to buy bad mortgage debt from the nation’s banks and will use the remaining money instead to help student loan, auto loan and credit card companies.

But rather than give money to private loan companies, the federal government should focus more on expanding federal student loans, says Barry Toiv, a spokesman for the Association of American Universities, which represents 62 leading research universities in the United States and Canada.

Federal loans have more preferable conditions than private loans, but federal aid is often not enough to help families cover rising college costs, as Diverse reported last month.

“Our institutions are certainly concerned about students’ abilities to remain in school and do want to ensure lenders can continue to extend loans,” says Toiv. “But our first priorities are government (loan) programs because they provide lower interest rates to students.”

In addition to making more federal money available to students, Burd adds that colleges “should shift money they currently spend on merit aid to need-based financial aid so that the students who truly need the help get it.”

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