February 4th, 2010
02:27 PM ET
6 years ago

CNN Fact Check: Student loans

(CNN) - President Barack Obama says the federal government is wasting money by paying banks to offer student loans, and wants to cut out what he calls "middlemen" who cost taxpayers billions, and to use the savings to expand other financial aid programs.

"It turns out that right now a lot of the student loan programs are still run through financial institutions and banks. So you got this middleman, and they get billions of dollars per year managing loans that are guaranteed by the federal government," Obama said at a New Hampshire event Tuesday. Obama said those middlemen "are essentially taking no risks, and yet they're still extracting these huge profits."

Read the facts and the bottom line after the jump:

CNN Fact Check: Would cutting student loan subsidies save taxpayers billions?

- The Obama administration says it can provide student loans far cheaper by eliminating the loan subsidies and lending directly to students through the Department of Education. The administration's 2011 budget projects savings of $43 billion over 10 years by getting rid of the subsidized private loans, known as the Federal Family Education Loan program, or "guaranteed" student loan, which provided more than $74 billion to about 15 million students in 2009, according to the Department of Education.
- The program pays banks the difference between the interest they pay on capital and the rates students pay them, currently capped at 6.8 percent.
- The Obama administration says the money it would save by ending the program would be used for other things. Obama has proposed using that money to lend directly to students from the Department of Education, to offer some relief from loan payments for graduates, expand Pell Grants and improve community colleges.
- Erin Dillon, a senior policy analyst at the Washington think-tank Education Sector, told CNN the government "can basically borrow at a much lower cost" than private companies. And since the financial meltdown of 2008, the feds have bought large numbers of loans from struggling private lenders, enlarging the government's share of the market. Dillon says she supports the president's proposal.
- The administration tried the same thing in 2009, and a bill that would enact the plan is pending before the Senate. During debate in the House of Representatives, where it passed in September, Republicans criticized it as a "government takeover" of the student loan industry.
- The administration's estimate is more conservative than the one put out in September by the nonpartisan Congressional Budget Office. The CBO report put the savings from the House-passed bill at at $80 billion, after factoring in a $7 billion cost to the Department of Education to manage student loans itself. An industry-backed alternative that leaves private companies to service government-issued loans would save $67 billion, $13 billion less than the original bill, the CBO reported.
- The Education Department attributes the discrepancy between its projections and the CBOs to differing assumptions about the future of interest rates.

Bottom line: Estimates published by both the administration and Congress suggest that ending the loan subsidies would save several billion dollars a year - but the Obama administration has plans for the money it would save in an education budget that is projected to grow by 6 percent in 2011.

Filed under: Fact Check • President Obama
soundoff (31 Responses)
  1. Steph

    Getting rid of waste and putting the funds to good use providing a better K-12 education. I think that's a great idea. Too bad this waste has been ignored for so many years and so many previous administrations.

    February 4, 2010 03:14 pm at 3:14 pm |
  2. WrongKindofChange

    What a surprise. Yet one more thing that Obama wants to take over. The government keeps getting bigger and bigger under gim doesn't it?

    February 4, 2010 03:15 pm at 3:15 pm |
  3. Orange Curtain, CA

    This is long overdue. I got completely robbed by my student loan lenders. They totally exploit desperate students with outrageous interest rates.

    February 4, 2010 03:16 pm at 3:16 pm |
  4. GI Joe

    How in the world can the republicans get bank kickbacks if they no longer drain every person trying to get an education?

    February 4, 2010 03:20 pm at 3:20 pm |
  5. Gee

    More smoke and mirrors....it would save nothing as the Dems would turn around and spend it on something else and kids still would have trouble getting loans for school..

    February 4, 2010 03:29 pm at 3:29 pm |
  6. Ed Tallahassee

    Cutting student loan subsidies save taxpayers billions, but it would limit the next generations chances at education and higher paying jobs, and a better standard of living. In the long run it shrink the tax base, and cost us more.

    But we'll save some pennies now at the cost of dollars down the road.

    February 4, 2010 03:29 pm at 3:29 pm |
  7. Josiah

    how about some more out of the box thinking Obama -we could have, should have, taken all that newly printed money thrown at banks and instead helped American citizens – how? – by overhauling a broken education system – 2 prong approach = 1. wipe clean all currently held student loans – nation wide – thus resetting the public and Sallie Mae, and alleviating the real burden on Americans – it's probably the real reason behind most housing problems (most problems actually) – the Money would be flowing immediately. if we weren't straddled with ridiculous sums of debt for a sub- par education we'd be prepared to pull America out of the dark ages and build it into a forward thinking country on the forefront of life's discoveries. and 2. overhaul the joke that is education in this country – let's stop rubber stamping graduates – ok if you take art history and a class on writing a paper, and one on note taking, and if there's any time, maybe a handful of classes that have anything to do with your major and voila break out the rubber stamp, welcome to the ranks of the jobless. This point should also institute a policy where Citizens pay at most about 5K for a full education – either the Gov. shakes up schools financing or pays the difference. – do away with all the lame Associate Degree stuff that should be taught and is in High School and have College's focus on Majors – the whole thing is a joke

    February 4, 2010 03:33 pm at 3:33 pm |
  8. conniesz

    So it comes down to how many billions of dollars can be saved? Who cares what the ultimate number is – go ahead and take the program away from the banks who get to make a profit with absolutely zero risk. If we, that is the tax payers, are taking all the risk we should most definitely be in charge of any profit to be made.

    February 4, 2010 03:37 pm at 3:37 pm |
  9. Dar

    I see good and bad in this.
    if we cut out the banks lending (middle man) and let the goverment take over, it would save the American people a lot of cash. But how many jobs would be lost in the banking industry that currently handle these loans?
    Now in the scheme of this it would create more goverment jobs, thus maybe off setting the lost jobs, So by the numbers Odumbo looks like nobody lost there job. And Odumbo gets what he wants, bigger goverment that you and I will now be paying for.
    The money that will be saved shold be used to to lower the deficit but Odumbo wants to use it to pay for more projects, more goverment.
    Like I said, I do see the good but I still see the bad too.

    2010/2012 REAL Change is coming

    February 4, 2010 03:37 pm at 3:37 pm |
  10. Scott

    At the same time, the administration needs to do something about inflation of education expenses. Every effort to make education more affordable through improved lending has translated into increased rates, essentially making it easier for graduates to educate themselves into lifelong debt.

    It shouldn't be a huge surprise that injecting liquidity in to education without some kind of price control leads to inflation, in this case somewhere around 11% annually. Schools that benefit from federal loans need to be held to some inflation standards before we go injecting even more borrowed money in to the system.

    February 4, 2010 03:45 pm at 3:45 pm |
  11. Sian

    I am in complete agreement with the President and his backer on this. Having worked for a student loan agency I have witnessed this practice fisrt hand. The agency pays big bucks to schools in th eform of sponsorships. In return schools direct students to a select list of preferred lenders who give the student loan agency these accounts to service. Many times students are unaware that they can obtain federally guaranteed loans from almost any bank under identical terms. One bank in my area extends loans only to students who have an account with that bank.

    February 4, 2010 03:46 pm at 3:46 pm |
  12. phoenix86

    Once again the Teleprompter in Chief has NO idea what he is talking about.

    February 4, 2010 03:48 pm at 3:48 pm |
  13. SIMP

    You know what? Why why why in the hell didn't CNN do all this dam fact checking when W was in office? Even though your little witch hunt after the President is bascially not working, he has been telling the truth on this stuff, it's those lying republicans you need to fact check.

    February 4, 2010 03:54 pm at 3:54 pm |
  14. ATL Guy

    The Republicans who are crying to the moon about deficits will not cut out this obvious example of wasteful spending. Why should the banks take the government's money risk free and lend to students and make money off of the lending activity and the interest on the loans? Sounds like a giveaway that needs to be killed.

    February 4, 2010 04:00 pm at 4:00 pm |
  15. JM in NY

    Wow CNN – do you realize you didn't even answer the question you posed? The answer is YES, cutting student loan subsidies would save taxpayers billions. That was Obama's statement and it is true. The fact that he wants to use the savings to more directly benefit students is not germain to the truthfulness of the statement. Really apparent bias in this report – shame on you CNN.

    February 4, 2010 04:02 pm at 4:02 pm |
  16. Evette

    Let me guess....the Grand OLD Party will go against this too........

    February 4, 2010 04:03 pm at 4:03 pm |
  17. Alan in Ak

    No doubt the republicans will say no, because.....well that's all they say isn't?

    February 4, 2010 04:05 pm at 4:05 pm |
  18. Josh

    Wow, a president who tells the truth. Refreshing...

    February 4, 2010 04:06 pm at 4:06 pm |
  19. Marlee Stone

    Don't you see, Obama just wants college age people to think he is the Lord Almighty - which he is not. Look, those are our tax dollars folks, not Obama's.

    February 4, 2010 04:08 pm at 4:08 pm |
  20. Michael

    Well, lets see how much mileage President Obama get this time! Normally, its maybe 24 hrs for what is good publicity or 24 hrs a day when the media sensationlize the reporting and beat a partisan political drum! President Obama is no Clinton, Bush or Reagan, he's his own man with confidence, wisdom, insight, intelligience, charisma, with faith in God and this country! Something that scares republicans, because they think the have cornored the market on faith in God and country! But, when it comes to insight, intelligience, fairness, and intelligience republicans are a mere shadowy figure of realism mixed with deceit, lies, distortions, racism, and values that reflect infidels not christians!

    February 4, 2010 04:22 pm at 4:22 pm |
  21. nomorepoliticsplease

    Republicans criticized it as a "government takeover" of the student loan industry.

    really? there is a "student loan industry"?

    do these people ever stop?

    February 4, 2010 04:27 pm at 4:27 pm |
  22. JoeAvalon

    Not only does this idea make perfect sense, but it also reveals the Republican motus operandi in all such issues of fiscal responsibility (including Health Care reform, where Bush only offered non-negotiable prescription drug coverage).

    All these ideas represent an attempt to take away government welfare to corporations and move towards fiscal conservatism. But the Republican's "spin" position is that it is a blatant "government takeover" of some corporate entitlement. Who are the fiscal conservatives? Who's is for welfare and entitlements?

    February 4, 2010 04:33 pm at 4:33 pm |
  23. TCM

    Why can't we just buy our grades from the colleges, like Saudia Arabia did for Obama?

    February 4, 2010 04:38 pm at 4:38 pm |
  24. FRank

    Why does Obama have to mess up everything? The man gets every single issue wrong.

    February 4, 2010 04:44 pm at 4:44 pm |
  25. Mark

    Duhh you left out some important stuff. obamy has proposed that college graduates who get jobs working for the government will be released from paying off their college loans after working ten years. For the dummies who work in the private sector, well their loans aren't forgiven for 20 years.

    Why should any loan be forgiven? You borrow, you pay back, simple right?

    Of course he wants to expand Pell Grants so the kids who never have worked to pay tuition can go for free.


    February 4, 2010 04:46 pm at 4:46 pm |
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