Treasury wrong to bail out private student lenders

If the progression of industries begging the Department of the Treasury for bailouts has left you increasingly unsympathetic, consider these people the icing on the cake: the ones you’ll be indebted to for 20 years after you graduate.

In a recent change to the Treasury’s bailout bill, the government has announced that part of the money will be used to guarantee consumer lending in order to stimulate spending in the economy. Among possible candidates were private student lenders, more than 60 of which have, in recent months, ceased offering loans.

The possibility has ignited a heated debate among education circles as to whether the decision places the interests of students at heart. Some wonder whether the money could be better placed. And while the Secretary of Education has already indicated that she will bolster federal loans, some feel that private loans should receive no assistance, or that any bailout package given to private lenders should include more stringent guidelines to benefit students.

Critics, such as the American Association of Collegiate Registrars and Admissions Officers, American Association of State Colleges and Universities and half a dozen similar groups recently sent a letter to the Secretary of Treasury urging his department to reconsider. Their concern is understandable – just last year, a massive scandal broke over conflict of interest between university financial aid departments and private lenders, especially notable since it’s many of the same groups implicated in last year’s scandal that are now cheering the Treasury’s decision.

The problem is that most students do not borrow from private lenders, and those who do are uniformly advised to exhaust every federal option beforehand. The only possible justification for a bailout of private education lenders would be that society loses potentially educated workers when students cannot borrow the necessary funds to attend school and that private loans would fill that gap. But if the government wants to spend money to fix this problem, it should lend the money itself, not pay failed third parties to make another go of it.

Most consumer markets do not have government agencies already established to help subsidize buying, but education is an exception. With the federal loan program in place, the Treasury already has a vehicle to promote higher education, and therefore does not need to bail out private lenders. It does not need to, in essence, pay them to continue trying to earn money.

Indeed, the possibility of a bailout would tempt any rational lender into feigning a great deal more helplessness than is accurate – only once it is clear that private lenders have to fend for themselves will they try to fix the mistakes that landed them in hot water.

Meanwhile, if some students still need additional funds, even after a possible expansion of the federal loan program, they might the unfortunate choice of attending less expensive schools or finding alternate funds. However, the theory that failed lenders must be propped up to facilitate buying was Fannie Mae and Freddie Mac’s death sentence, and there comes a point where enough is enough.

Uncle Sam can only do so much.