The federal government provides student loans for college and graduate school in two ways: by guaranteeing bank loans, and by lending directly to students. In the guaranteed loan program, banks lend students money and profit from the interest payments while the government guarantees the loans against default and makes subsidy payments to the banks. In the direct loan system, the government provides low-interest loans directly to students, using borrower interest payments to help cover the costs of the program. There have been numerous audits and investigations of both the direct and guaranteed student loan programs, and in every case the auditors have agreed: Direct lending is much more cost effective. Switching completely to direct lending would save billions of dollars a year. Congress should move all campuses to direct lending and turn the savings over to colleges and states for programs that ensure that all Americans have access to higher education.
October 1, 2004
Research and Occasional Papers Series (ROPS)
Shireman, R. (2004). Straight Talk on Student Loans. UC Berkeley: Center for Studies in Higher Education.