Our View: Eliminate middleman to alleviate college loans

In the past decade, average college tuition has increased by twice the rate of inflation, and those were the good years. Students at Washington state’s four-year universities can expect to see increases of up to 14 percent in each of the next two years. Those at community and technical colleges will see 7 percent bumps.

Meanwhile, tax-exempt college savings plans have plummeted with the stock market. Total assets fell 21 percent last year, according to finaid.org, a financial aid Web site. Washington state’s Guaranteed Education Tuition program, in which today’s rates can be locked in for future use, will increase the per-unit price from $76 to $101. Some states have closed similar programs to new enrollees for fear that they won’t have enough money when it’s time to pay out.

However, in the face of all this dreary news comes the Obama administration’s plan to cut student loan costs. The plan calls for government to directly lend money to students, cutting banks out of the loop. The Congressional Budget Office estimates that this will save $94 billion over the next decade. The administration would like to claim some of that money to boost Pell grants and Perkins loans. Pell grants are direct student aid for low-income students. Perkins loans help bridge the gap between scholarships, aid and other loans.

Banks in the student-loan business are not happy and have turned up the heat on Congress, but the Congressional Budget Office studied two student loan programs – one that funnels the money through banks and another that directly lends the money through the U.S. Department of Education – and found that when the subsidies to banks were accounted for, the private channel was pricier.

Put another way, the government could offer more loans and aid if it closed off the “private” avenue. Actually, it was never really private, because the government assumes the risks if students default on the loans.

If government wants to make college more accessible, it needs to alleviate the mortgage-size debt for some students and their families. Two-thirds of undergraduates leave college with debt, and graduate and professional students borrow $27,000 to $114,000. Failure rates on student loans are increasing, and it is government, not the banks, that takes the hit. In recent months, the government has bought back billions in loans from struggling banks.

These loans were created with students, not banks, in mind. Whatever method benefits them most is the path this nation should take.