Cramer: All Student Loans Could Lead to D.C.

Let’s take some time to revisit the student loan market, especially since President Obama came out with a plan recently to cut out the middleman and make Uncle Sam the direct lender of choice for college-bound Americans for the foreseeable future.

I’ve already written about getting and managing student loans in a recession (see the manifesto on student loans I wrote in late January).

But the new Obama plan deserves some close scrutiny. As part of his 2010 budget, which he rolled out on Feb. 26, the president announced that the federal government would elbow private student loan lenders, like Sallie Mae (Stock Quote: SLM), out of the way and have families come to the U.S. Treasury directly for student loans.

Now, there are some elements of President Obama’s overall higher education program that I support. For example, making permanent the $2,500 tax credit for family’s college spending needs (for stuff like books, computers, and necessary items like that) is a good idea. I also like the $2.5 billion that gives grants to states to help lower-income families pay for their kids’ college education (although that, too, might have waited until we were out of this economic mess).

But the direct lending program has its pros and cons. The call to reform student loans to a more government-centric approach is both bold and disconcerting. Bold because of its aggressive approach to real reform in the student loan market, especially at a time when so many American families are hurting, and when credit has become so tight. It’s disconcerting, however, because it keeps the private sector at arms length, which could reduce competition and make matters worse in the student loan sector.

Here’s how it would work: The U.S. government would cut out the bank- and lender-based (“private sector”) loans and originate all loans with the U.S. Treasury Department. The government, controlling all the levers here, would allow private lenders to compete for the servicing portion of the loan, for things like collecting on the loans and managing the paperwork.

The Obama administration’s fiscal argument is a reasonable one, although—typical for the White House so far—the numbers don’t really add up.

Government budget analysts say that the switch to a direct lending program would save $24 billion over five years, mostly by ending the practice of the federal government reimbursing private lenders for issuing and guaranteeing student loans. A lot of that money, however, would seemingly have to go to support annual funding for government-held Pell Grants, which would act as the de facto loan disbursement engine for the revamped student loan program. I noticed that in the proposal spin from the White House, the word “permanent” was used to describe the new flow of money into Pell Grants.  In Washington, “permanent” is code for “use the taxpayer as an ATM for as long as we want.”

So I’m not sure how much actual savings we’re going to see. Plus, we’ve already seen a lot of money pouring out of the government-run student loan programs in the past few years, so Obama and Congress will likely have to refill those coffers with money that hasn’t been identified yet. That’s also likely to eat into the $24 billion savings that the administration is touting.

But that’s the Washington angle. What’s the MainStreet angle? It’s early, and this thing hasn’t passed Congress yet, but if it does, it means pretty significant change in the way we look at student loans.