Wednesday, August 19, 2009

It’s a Pity They Can’t Both Lose

by Andrew Gillen

Many of you have been following the brawl over student loans, with the Obama administration favoring switching all lending over to Direct Loans (DL), and the banks resisting, favoring the FFEL program where they are subsidized to lend to students. As I watch the fight between the pro-DL side and the pro-FFEL side (fueled in part by the intense lobbying of Sallie Mae), I channel Henry Kissinger and think “It’s a pity they can’t both lose.”

While I won’t go into it again here, I’ve been pointing out the problems with the pro-DL side, mostly because they are using some really wrongheaded arguments - bordering on sheer fantasy - to advance their case. Some apparently think this means I’m pro-FFEL in spite of the fact that I’ve written things like “the FFEL subsidies are a waste of taxpayer money, [so] I can certainly appreciate the goals of [pro-DL] proponents.” Anyway, since this issue doesn’t seem to be going away, I thought I’d spell out my thoughts in a bit more detail.
1. FFEL should be taken out back and killed with a shovel
It has repeatedly shown that it is a corrupting program, both for the financial aid administrators and the lenders. Moreover, Congress can't keep it's hands off it.
2. DL should not be the monopoly lender
The same logic that would imply the government should be the only lender in student loans implies that they should be the only lender in any market. People seem to intuitively grasp that this is a really bad idea for their mortgage and auto loan, but think it will be just fine for other people's children.

Ideally what will happen is this. Democrats will kill off FFEL. It deserves to die, and it is unlikely that Republicans would be able to bring themselves to do it, so it might be now or never. Unfortunately, the Democrats will then impose a DL monopoly. This will suck, but in another 4, 8, or 12 years, Republicans will probably come back into power. When that happens, three things make it very likely that DL will in turn be killed. First, Republicans won’t be operating under the assumption that the government is both good at, and should be doing, just about everything.

Second, the longer the program is in operation, the more evident it will be that the huge piles of money that Democrats are now promising were based on fantasy. The program will make money, but nowhere near the 94b or 80b figures that they keep throwing around. This is problematic because they are going to spend all 94b or 80b, and then act surprised when much of the savings don't materialize. There is even a good chance that any money the program would have made will not materialize as Congress tries to buy votes by continually lowering the interest rate charged.

Third, the structural deficit of the country will be in crisis stage. Social Security expenses will exceed revenues by 2016, and our current health programs are already a massive drain on the Treasury, let alone whatever new health programs will be added in the near future. Thus the government will be desperate for cash. Switching from a DL to a private lending model will be a great way to improve the cash position of the government. The payments from the old loans will still be coming in, but new loans will be provided by private financial institutions, freeing up that money for other uses.

Thus, it is my hope and prediction that within a decade or so, both FFEL and DL will be consigned to the dustbin of history, replaced by a new, better, private lending program. I’ll lay out my thoughts on what that program should look like eventually, but this post is already a bit long, and I’m in no rush since I reckon I’ve got a few years before all this plays out.


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Unknown said...

There is even a good chance that any money the program would have made will not materialize as Congress tries to buy votes by continually lowering the interest rate charged.

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