Should the Government Bail Out Private Student Loans?

As part of the $700 billion government bailout, Secretary of the Treasury Henry Paulson wants to use some of the money to purchase private student loans. Is this a good idea?

First of all, it’s important to distinguish between federal student loans and private student loans.  Federal loans are guaranteed by the U.S. government.  Students become eligible for these loans by filling out a Free Application for Federal Student Aid (FAFSA) form.  According to the San Antonio Express, federal student loans have not been affected by the financial crisis, and there’s a good chance things will stay that way.  Since these loans are guaranteed by the government, they’re about as low-risk as you can get as far as banks are concerned, so hopefully, the federal student loan system is secure.

On the other hand, there’s the issue of private student loans, which are loans that parents and students take out to supplement the amount of financial aid granted by the FAFSA.  These loans are taken out from a bank, and therefore, they’re not all that different from any other line of credit that a consumer might obtain.  And since it’s very difficult for many people to get credit these days because of the financial crisis, it’s harder to take out private student loans.

So should the U.S. government bailout providers of these private student loans the same way they are bailing out providers of other kinds of loans?  Proponents say yes because it’s crucial to make sure that these funds remain available to students and parents, and that it’s in the interest of the economy as a whole to bail out large financial systems that are failing.

On the other hand, the Project on Student Debt strongly opposes these bailouts.  This watchdog organization feels that private student loans are not in the interest of consumers and students, and therefore the government should not encourage such loans.  Along with seven other organizations, the Project on Student Debt sent a letter to Henry Paulson outlining their position against private student loan bailouts.

So what do you think?

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