Thursday, March 18, 2010

The Nationalization of Student Loans is Part of Health Reform

The nationalization of student loans joins the Louisiana Purchase, Cornhusker Kickback, Gatorade, Bismarck bank, Central Valley water, immigration reform, and judgeships as part of the nation’s health reform act.

One of President Obama’s ongoing goals is the nationalization of student loans. As a Populist/socialist, he has been appalled by the profits bankers make on these loans.

The Democratic Congress has tried for three years to kick the bankers out of the Perkins, Stafford and Plus loan programs. The House backed the nationalization by voting to end support of federally guaranteed student loans by banks and other private lenders, but the Democrats lacked 60 votes in the Senate to do so.

In reality, President Obama hates the bankers. Even prior to his election, he lashed out at the obscene profits made by bankers, not to mention insurance companies. President Obama on September 21, 2009 criticized the large U.S. banks for opposing the changes in the student loan program. The President asserted the banks, receiving Tarp funds, wanted to maintain the status quo because they get an “unwarranted subsidy.” He accused them of enjoying “a free ride from taxpayers for too long.” Populism to the core!

The goal is to go to a single payer system, the federal government. The conversion, coupled with the elimination of federal subsidies, will in theory result in savings of $87 billion over the next decade. I have a bridge in Brooklyn for you, if you believe these figures.

Congress plans to allocate these savings to the Pell Grant Program, early-childhood education, and community colleges. Until then, the House is counting these “savings” as half of the deficit reducing effect of the Health Reform Legislation. Double counting is rampant in the proposed legislation.

In any event, we now have the stealth student loan reform bill concealed in the “Deem and Pass” and Reconciliation Bill.

The Act will remove private lenders from the guaranteed student loan program, with the sole exception of the Bismarck bank.

The computed savings will not, of course, materialize. First, they will be eaten up by a burgeoning federal bureaucracy. Second, business will be lost to the private lenders, who may be charging more, but provide an attractive service to borrowers. Third, some universities are already engaged in direct lending.

One of the competitive advantages of the private loans is the efficiency of their process, the ease of borrowing. A phone call or a few clicks on the computer can result in a quick approval.

Compare that to the tortuous federal FAFSA with 110 questions. Congress has mandated a shortening of FAFSA, but we’ll see. The General Accounting Office (GAO) published a study in October, “Federal Student Aid; Highlights of a Study Group on Simplifying the Free Application for Federal Student Aid.” The 26 page report is exceedingly non-illuminating.

Members of Congress, especially Democrats, have a very short memory.

One of their first priorities upon achieving control of Congress three years ago was to strike out against private lenders. Congress enacted the 2007 College Cost Reduction and Access Act, which cut the federal subsidies by $20 billion, and cut the interest rate in half from 6.8 to 3.4% by 2012.

Congress proves every day that it lacks an understanding of even basic economics. Major banks, including the Bank of America, Citigroup, JP Morgan Chase, SunTrust, and Wachovia, as well as other private lenders, 106 lenders in all, quickly pulled out of the market. Students at schools with high default rates were especially at risk. State lending agencies in Indiana, Iowa, Kentucky, Massachusetts, Michigan, Missouri, Montana, New Hampshire, and Pennsylvania were financially unable to fill the gap in their states.

Hundreds of thousands, if not millions, of college students faced a lack of college financing. An educational, and political, apocalypse was in the making.
Congress responded by bailing out the student loan program and the lenders at a higher cost than it expected to save.

So far, it’s déjà vu all over again.

However, the private lenders have prospered, even with their costlier and riskier loans, in the non-federally guaranteed student loan market. Their market share was only 6% in 1998, but tripled to 24% in 2008. One competitive advantage they possess is their efficiency in the lending process. Perhaps more significant are the escalating costs of college, which often exceeds the limits on federally guaranteed loans. Students must turn to private lenders for their loans. Think of law students who often graduate over $100,000 in debt.

Congress could offset this reality by sharply increasing the lending limits on their loans. To do so though would be to expose taxpayers to billions in losses, reminiscent of Freddy Mac and Fanny Mae. Student default rates have doubled and tripled in this economy. Guaranteed student loans are almost impossible to discharge in bankruptcy, but that doesn’t make them any easier to collect from an unemployed graduate.

President Obama calls his plan a “no-brainer.”

No comments: