Analysts have been watching the Illinois Student Assistance Commission lately. It recently sold about $1.4 billion in student loans, about half of the loans it had been holding. The agency was also looking to shop another $1 billion in its remaining portfolio. The agency sold an additional $629 million in loans in January.

What’s with the sale of all of these student loans? It seems that the state government in Illinois found it burdensome to service all of these student loans. It’s become too risky for the state to continue to hold these loans, so off they go. (Risk, in this case, has as much to do with the upcoming election cycle as it does with the general state of the economy.) This is another great illustration of why governments should not be in the business of lending. Their tolerance for risk is low, and what they perceive as risk is colored by which way the political winds are blowing.

That really has no place in professional lending. Lending should be left to lenders. Lenders understand the risks when they make the loans, and understand how to help borrowers perform according to the loan terms. FFELP lenders have worked with their borrowers and with the colleges and universities to develop programs that mitigate the risk. In mitigating risk, the FFELP lenders can make loans to “risky” borrowers. The FFELP’s programs transform “risky” loans into performing loans by working to eliminate the causes of default. Government lenders simply run and hide, or take the loss and pass the costs back to the taxpayers.

So the ISAC sells most of its loan portfolios, and destabilizes the services it has provided to student borrowers. It minimizes the services it can offer to the borrowers in its remaining portfolio. To make matters worse, the student loans sold by ISAC were sold at a much smaller premium than the initial sales in January.

The overall effect for the borrowers is that they now deal with a new loan servicer – one they’ve probably never heard of. The companies that purchased the loans are probably OK to deal with, but if they aren’t, at least the borrower has options, right? Maybe not. Under the old rules, these borrowers would have the opportunity to move their student loans to a servicer of their choice by consolidating their loans with a different lender. Student loan consolidations are going to be pretty hard to come by, and lenders will have little or no incentive to assist students who are looking to consolidate student loans.

This kind of instability is exactly why governmental agencies should be in the lending business. No matter where their heart is, they aren’t lenders. They’re subject to political machinations that can change on a daily basis. Borrowers need stability. Tell your Congressional Representatives that you don’t want the student loan system dismantled. You want stability in lending and loan servicing, such as what you get with FFELP lenders.