The Problem with Student Loans

Posted by in Uncategorized Sep 16th, 2007

Since 2006, students attending qualified online schools have been able to receive federal financial aid. However, as we've learned from the recent student loan scandals, it's always a good idea to research loans yourself. Several schools have been discovered accepting kickbacks for recommending certain lenders to their students.

A recent slate article argues that the student loan system is fundamentally flawed. Here's a blurb:

"If you know anything at all about the federal student loan program, you will not have been surprised by the scandal of recent months. The only amazing thing is that it has taken so long to arrive. Here's how the program works: Banks and other private companies lend money to students. The federal government pays part or all of the interest-currently 7 percent or 8 percent. The government also guarantees the loans.

What is wrong with this picture? Well, the government itself borrows the odd nickel to finance the national debt. This borrowing, obviously, is also guaranteed by the government. For that reason, it carries an interest rate of only 3 percent or 4 percent. If the government can borrow money at 3 percent or 4 percent, why should it be paying 7 percent or 8 percent for the privilege of guaranteeing loans to someone else? Wouldn't it make more sense for the government to loan out the money itself?"

Federal student loans are still one of the best ways to get a low-interest rate and flexible terms. But, I agree that the system needs reform.

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