Last week’s enactment of historic health care legislation eclipsed another momentous victory for the commons: the reclamation of the federal student loan program, which had been captured and milked for decades by voracious private lenders.
As I’ve discussed over the past year, our free market-loving banks have no objection to socialism when it reduces their risks and guarantees their profits. That’s exactly what the student loan program did. The banks were only too happy to act as middlemen in making loans to students. It let them make risk-free profits, exploit a captive clientele, collude with colleges and universities to keep the game going, and jack up the interest rates and fees charged to students.
The Congressional Budget Office estimated that the government could save $94 billion over the next decade by bypassing the banks and making the loans directly, through college financial aid offices. A Government Accountability Office study found that the federal government’s costs would decline from $9.20 per $100 in loans made, to $1.70 per $100 in (direct) loans made. Big difference, huh?
That gives you an idea of the actual inefficiencies (i.e., unnecessary rake-offs) that private bank lending entails. As the shape of the student loan legislation changed, the CBO later lowered its savings estimate to $67 billion over ten years. This is still a rather substantial sum, especially since those savings will allow interest rates for students to be reduced from 8.5% to 7.9%.
It will also allow the amount of direct aid to students, through Pell Grants, to be raised. And more students (and parents) will be able to get education loans: The denial rate in the direct loan program is half that of the program for federally guaranteed student loans.
Naturally, Republicans and the Wall Street Journal are denouncing the direct government lending as a “government takeover” of banking. “We now have the government running banks, insurance companies, car companies,” Senator Mitch McConnell of Kentucky told the Washington Post. The next step is to “take over the student loan business.”
It’s a cynical, disingenuous argument. The government is stamping out corporate socialism. That’s a “government takeover”? How can the government be taking something over that it already oversees (through its loan guarantees)? Ain’t no free market now. Just corporate dole.
The student loan program had become a classic case of socializing the risks and privatizing the profits. The major difference in the new legislation is simply this: Instead of letting the banks pocket all the profits for their role as risk-free middlemen, students and taxpayers will reap the substantial benefits instead. Sounds good to me.
A hearty salute to the Obama administration for persisting in its quest to reclaim control of the student loan program, and for its ingenious legislative tactics in overcoming the powerful banking lobby, which nearly scuttled this legislation.
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