One of the hot financial topics right now is nationalization-the idea of the government taking over operation and control of a particular industry. While the future role of government within banks and automakers is still being decided, one decision that has been made is that all college loans will now be handled directly by the US Government.

In the past, third party lenders have been responsible for about 80% of student loans through the Federal Family Education Loan Program, or FFELP. The Federal Direct Loan Program-in other words, the government itself with no intermediary-handled the remaining 20% of student loans. These loans include the Stafford Loans, made to students, and PLUS loans, made to parents of students.

The new Federal budget proposal released by President Obama calls for 100% of these loans to be handled by the Federal government. There are a few key reasons for this. The main reason is that the proposal claims that without having to subsidize FFELP lenders, Uncle Sam will save over $4 billion a year, and over $47.5 billion over the course of 10 years.

In addition to the financial benefit, the student loan industry has been under a great deal of scrutiny after a 2007 scandal that revealed lenders were providing kickbacks to financial aid offices for steering business their way. The short term consequence was a reduction in subsidies, but it appears that third party lenders will no longer be in business when it comes to college loans under the new budget.

There are pros and cons to a decision like this. The obvious pro is that the cloud of suspicion over the student loan industry will be largely removed and all student and parents will know that they are being treated equally. The downside is that without competition among lenders, interest rates may increase in the absence of competition among lenders.

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Tags: college loans, Federal Family Education Loan Program, FFELP, Loans, student loans

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