Banking Industry Reaps Billions in Profits That Could Be Applied to Student Aid

New data from Center for American Progress released today demonstrates billions in federal student loan money is needlessly siphoned off to the banking industry. Billons of dollars in additional low interest federal loans would be available for needy students if each college and university in America cut out the bankers and offered financial aid through the Direct Loan Program. The report, Putting Students First, identifies the savings at the institutional and state level.

Currently, schools can offer their students loans administered through the Direct Loan Program or the FFEL Program. In the FFEL Program, banks make the loans, but the government guarantees repayment in the case of default and guarantees a profit for the bank, paying a subsidy if the student interest rate falls below a set level. In the Direct Loan context, the government is the lender, eliminating the costs of a middle man and ensuring that the profit goes back to the taxpayers. The cost of administering the FFEL Program is 10 times higher than the cost of the Direct Loan program.

The report recommends that the savings realized from shifting to the Direct Loan Program be passed along to students in the form of expanded student aid. Carmel Martin, associate director for domestic policy at the Center for American Progress, noted: "Just imagine what UCLA could do with $14.4 million per year in expanded student aid. Penn State could be given access to $27 million in savings and the University of Texas System could be given over $42 million per year."

The Center has released the data to inform the debate as Congress considers legislation to reauthorize the current student loan programs. Some members of Congress have argued for ending the ability of student borrowers to consolidate their loans at fixed interest rates as a way of realizing savings and expanding aid. Martin urged, "Those who want to generate savings by making it harder for students to pay off their loans should look at the numbers. Direct lending is a better deal for students and taxpayers alike."

The full report can be found here.

More information on student loans can be found in today's Progress Report.