Background

Currently, the federal government operates two major programs to provide loans to help students pay for college: the private sector Federal Family Education Loan (FFEL) program and the government’s Direct Loan (DL) program.

President Bush’s recent budget reveals that the bank (FFEL) program costs taxpayers billions of dollars more each year to run than does the DL program. From 1992 to 2004, the cumulative taxpayer subsidy costs were $39 billion for FFEL loans, and only $3 billion for Direct Loans. For a typical college student’s debt of $20,000, the federal government spends nearly $2,200 more in subsidy costs for a loan through the FFEL program.

The Student Aid Rewards (STAR) Act supports schools that use the Direct Loan program and offers them half the savings in the form of additional need-based grant aid. Private lenders like Sallie Mae, fearing cuts to government subsidies, oppose the legislation.

Private lenders have used guaranteed student loans to create enormous profits for their shareholders while the federal government assumes all of the risk of the loans. As students carry more loans, the student loan industry has become a hugely profitable business. Fortune 500 ranked Sallie Mae as the second most profitable on their return on revenues.

Sadly, in the face of a growing budget deficit and dwindling aid for students, Congress has done little to help American college students and their parents deal with skyrocketing tuition. They should support the STAR Act to make sure that funds for student aid actually help make college education accessible.