Student Loans Debate and Poll
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For years banks have profited handsomely from student loans due to taxpayer-subsidized interest rates. During discussion of the Higher Education Act Reauthorization (S. 1882), Sen. Edward Kennedy (D-MA) offered an amendment that would establish a two-year pilot program to auction off the right to make student loans, thus allowing the free market and competition to set loan interest rates.
Under the version of S. 1882 reported from committee, banks would see an average return of 16 percent on student loans according to the Treasury. This would not only be higher than their previous returns, but also excessive considering that these loans are guaranteed by the federal government and thus risk-free.
The non-partisan U.S. Congressional Budget Office concluded, "banks do not require the same returns on [FFELs] that they require overall since federally guaranteed student loans are less risky than the average bank asset."
These inflated high interest rates would cost American taxpayers at least $1 billion over the next five years. Other federal programs use auctions to protect taxpayers. Furthermore, the student loan pilot program would not be compulsory, since colleges would only participate on a volunteer basis.
On July 9,99 the Senate rejected the amendment, 39-58 and so banks win.