Private Markets for Student Financing

A private student-loan market exists now, filling some of the gaps of need unmet by current government programs. But it falls short of this ideal in critical ways. Therefore, while conservatives are correct to criticize federal lending programs, they must devote an equal amount of energy to addressing some of the barriers — beyond crowd-out from federally subsidized loans — that prevent private markets from operating as smoothly as proponents would like. By fostering a more robust and compelling array of private options, policymakers on the right can better make the case for alternatives to government involvement. Private student loans made without any federal subsidies or guarantees represent a relatively small fraction of the student-lending market. In the 2014-15 academic year, private lenders issued roughly $9 billion in student loans. Policymakers must also take steps to facilitate private markets worthy of all students. This starts with avoiding questionable public-private entanglements that enable politicians to talk big about markets while maintaining a troubled status quo. It also means looking at reforms — clarifying fair-lending laws, increasing market transparency, and bolstering bankruptcy protections — that would help private student-lending markets operate in a way that more closely approximates a real market. Reform-minded policymakers would be advised to plant these seeds now — with the hope that an improved set of market options tailored to the needs of a broad array of students will emerge in time.

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