Monday, December 07, 2009

The Student Loan Battle Continues, Part 2

by Andrew Gillen

As I noted on Friday, the CBO has now estimated that the lenders alternative to SAFRA would save $75 billion dollars. This intensifies the battle over SAFRA, as there is now a plausible alternative for the Senate to rally around. I can’t tell if this is good news or bad news.

Much of the fighting taking place between SAFRA and the lender sanctioned alternative concerns which proposal will save more money. Neither of them is ideal on this count.
if the motivation of dropping the FFEL is to save money, than that is the wrong policy. To save even more money, drop the SAPs (payments to lenders) for FFEL and abolish DL.
What are the prospects for doing this? Not good. To begin with, none of the bills in play advocate this. In addition, looking at the bigger picture of finances in general, I’ve been horrified by the financial community’s ability to stave off needed reforms, especially as it relates to moral hazard. While I think that the Obama administration made a strategic mistake by not addressing this before moving on to other issues such as health care, there is something highly disturbing about the effectiveness of their resistance. If we can’t get serious reform in the aftermath of the worst financial crisis in 80 years without the undivided attention of the President, that doesn’t bode well for ever fixing the problems with FFEL. When combined with the lobbying by the lenders using such high powered Democrats such as Jamie Gorelick and Tony Podesta, I think the prospects for turning FFEL into a rational program in the absence of the current crisis are very small.

Thus, I don’t think the ideal policy of dropping SAPs (subsidies to lenders) and killing DL is achievable as a single step. That is why I’m rooting for a roundabout way to achieve it. The first step is to eliminate FFEL. That is why I am rooting for a pyrrhic victory for SAFRA as far as student loans are concerned. There are some other provisions of SAFRA that I’ve got some qualms about, but I hope they are successful in killing FFEL. As I outlined in this post, once FFEL is dead, the political landscape, the weaknesses of DL, and the cash flow issues of DL will begin to strongly favor the emergence of a private lending program, one that should avoid the problems inherent in FFEL.


Trace Urdan said...

Given that the money the government lends is borrowed from the capital markets in the first place, why is it preferable that the government borrow and re-lend than having commercial lenders borrow and re-lend? Granted that with the shutdown of the secondary market for student loans, the government has had to step into this role, but this is surely a temporary phenomenon. The savings you reference is simply the government grabbing the difference between the rate at which it lends and the rate at which it borrows. Why is this an appropriate exercise for our government?

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