Since I started covering student loan debt in 2004, one fact has been abundantly clear: Giving away taxpayer money to banks so they can make student loans is bad policy.
Not only does it cost billions of dollars, not only is it unnecessary, but I argue in my new book that the Federal Family Education Loan Program has had some severe unintended consequences, driving up the cost of college and leading to policies that victimized thousands of students.
In the mortgage crisis, the availability of easy money to pay for houses was a huge factor in driving up prices. It hasn't been much talked about, but there's been a credit bubble in education too. Student loans were repackaged & securitized, which drove lenders to market them ever-more aggressively to students and to create new products like the private student loan. Families were not as sensitive as they should have been to price increases, because they had loans to make up the difference. State universities practiced cost-shifting, a major factor in the staggering tuition increases of the past few decades. When state governments cut funding for higher education, colleges raised tuition, and student loans, again, made up the difference.
This reform will also help tame the financial industry's influence in Washington. Student lenders in the past decade grew into a powerful lobby. They forced changes to bankruptcy law in 1998 and 2005 that made it almost impossible for a borrower to escape from federal student-loan debt and private student-loan debt, respectively. Thousands of borrowers are living nightmare lives because of this inflexible law.
Now, thanks to Obama, the student lenders have been broken. Student loans will come directly from the government. Colleges have been preparing for this move for the past year. But there are still important changes to be made before student borrowers can really heave a sigh of relief: bankruptcy protection for student loans is one. Expansion of the Income-Based Repayment program, so all graduates have the right to an affordable repayment plan is another. Reining in the excesses of the private student loan market is a third. And underlying it all: changes to make college more affordable, whether students are paying with loans or not.