Unnecessary Giveaways to Unnecessary Loan Servicers Produce Results You’d Expect

The portion of the 2010 reconciliation bill that included the Student Aid and Fiscal Responsibility Act (SAFRA) did a significant deal to improve and streamline the federal student aid system. Switching to an all Direct Loan system saved billions of dollars* and put to rest the illusion that private lenders were doing much in a system that by the end had them getting both funds to make loans at a stated rate, a near 100 percent government guarantee, and regular subsidies also at a stated rate. 

But passing SAFRA required making concessions to a set of nonprofit entities that often had the ear of their local legislators thanks to their quasi-public status. So rather than moving to a system where the Department would have all new Direct Loans be serviced by one of four companies that successfully won a contract, it would also have to give each eligible nonprofit entity the loans at least 100,000 borrowers to service.

Three years later 

* Yes, even under fair value accounting.

Ending unnecessary subsidies for banks and allowing the Department to origiante and service the loans they were already