(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.