The Next "Logical Step"

By Andrew Gillen

The NY Times reports today that new legislation has been introduced that some are billing as the next "logical step" to solve the student loan crisis.

For those of you who missed it, Congress lowered the fees and interest rates that private lenders can charge for federally backed student loans. Unfortunately for Congress, they did this in the midst of the credit crunch when capital was already becoming scarce, raising the costs to lenders of providing loans. Unsurprisingly, higher costs and lower benefits have combined to make the private loan market unattractive. Lenders have been pulling out of the loan programs, and those that remain have been dropping "high risk" schools.

That's where the new legislation comes in. It will ensure that "lenders that participate in the federal loan program would have to extend credit to any eligible student" so as to ensure access. In reality, what this will do is push even more lenders out of the market, which would require more borrowing directly from the federal government. A terrific WSJ editorial made a note about previous proposals that still sums up Congress's actions:

Congress mandated a return on student loans that is too low to attract private capital in the current market... [So now] Taxpayers will bear more risk so that Congress can fashion a new business model to replace the one it just destroyed.

Even if there are private lenders that survive this, they will be private in name only. In what sense is a business that has its prices fixed, and customers selected by the government "private?"** If the goal is to outlaw private lending (and that is the only way in which I can see this being a "logical step") then just do it outright. The virtues of private vs. public lending would be a useful debate to have. But this piecemeal attack on private lenders to drive them out of the market (this may or may not be the goal, but it will be the effect) is sneaky and underhanded.

** I can think of only one other type of "private" business that has prices and customers selected by the government, and that is utilities. But utilities are regulated to prevent the market power that would arise from economies of scale. What market failure is all this legislation supposedly addressing?