Robert Costa at The Corner:
Sen. Lamar Alexander (R., Tenn.), the U.S. secretary of education from 1991 to 1993, tells National Review Online that President Obama’s revamping of the federal student-loan program is “truly brazen” and the “most underreported big-Washington takeover in history.”
“As Americans find out what it really does, they’ll be really unhappy,” Alexander predicts. “The first really unhappy people will be the 19 million students who, after July 1, will have no choice but to go to federal call centers to get their student loans. They’ll become even unhappier when they find out that the government is charging 2.8 percent to borrow the money and 6.8 percent to lend it to the students, and spending the difference on the new health-care bill and other programs. In other words, the government will be overcharging 19 million students.” The overcharge is “significant,” Alexander adds, because “on a $25,000 student loan, which is an average loan, the amount the government will overcharge will average between $1,700 and $1,800.”
“Up to now, 15 out of 19 million student loans were private loans, backed by the government,” Alexander says. “Now we’re going to borrow half-a-trillion from China to pay for billions in new loans. Not only will this add to the debt, but in the middle of a recession, this will throw 31,000 Americans working at community banks and non-profit lenders out of work.”
Alexander, a former University of Tennessee president, says the effects of Obama’s policy could be felt for decades. “When I was education secretary, one of my major objections to turning it all over to the government was that I didn’t think the government could manage it,” he says. “This is going to be too big and too congested, and makes getting your student loan about as attractive as lining up to get your driver’s license in some states.”
“It changes the kind of country we live in more than it changes American education,” Alexander concludes. “The American system of higher education has become the best in the world because of choice and competition. Unlike K-12, we give money to students and let them choose among schools, having the choice of private lenders or government lenders. That’s been the case for 20 years. Having no choice, and the government running it all, looks more like a Soviet-style, European, and even Asian higher-education model where the government manages everything. In most of those countries, they’ve been falling over themselves to reject their state-controlled authoritarian universities, which are much worse than ours, and move toward the American model which emphasizes choice, competition, and peer-reviewed research. In that sense, we’re now stepping back from our choice-competition culture, which has given us not just some of the best universities in the world, but almost all of them.”
Opponents have denounced this change as a government takeover of the student loan market. That makes for a great soundbite, but overlooks one key fact: the federal government took over this part of the student loan business a long time ago.
In a private lending market, you would expect lenders to make decisions about whom to lend to and what interest rates to charge. And in return, you would expect those lenders to bear the risks of borrowers defaulting. None of that happens in the market for guaranteed student loans. Instead, the federal government establishes who can qualify for these loans, what interest rates they will pay, and what interest rates the lenders will receive. And the government guarantees the lenders against almost all default risks.
In short, the government already controls all of the most important aspects of this part of the student loan business. The legislation just takes this a step further and cuts back on the role of private firms in the origination of these loans.
That step raises some interesting questions about the costs of the current system (see this post), possible benefits of the current system (some colleges and universities appear to prefer working with private lenders), and the potential budget savings of cutting out the middle man (which appear to be large but somewhat overstated in official budget analyses).
But it hardly constitutes a government takeover.
Tim Carney at The Washington Examiner:
While nationalizing student loans may seem irrelevant to “reforming” health care, there is something fitting in pairing the two undertakings in one bill — it’s almost a foreshadowing. Student lenders have long fed at the federal trough, pocketing so many subsidies that Democrats were justified in asking why there needed to be a private sector in that industry at all.
This weekend, it’s the drug companies, hospitals, doctors, and insurers who are latching more firmly at Leviathan’s teat. How long before Congress decides to knock out the profit-taking middleman, and institute a single-payer system or even a national health system?
When we get wherever this “reform” is taking us — when our deficits are ballooning and health care is scarcer — we may remember the games, gimmicks, and scams used to pass it into law, and maybe conclude that evil means yield evil ends.
This is less a case for allowing student leaders to feed at the federal trough than it is a case against the structure of the health reform legislation, and the tight regulation of insurers that it entails.
Notice that banks would be free to continue to make student loans. And they’re not having their existing assets taken. All they’re losing is the ability to make publicly subsidized student loans in the future. A comparison with Soviet nationalization is just nuts. And it’s not even what Alexander said.
Anyway, the headline-post gap wasn’t what first struck me about this. Neither was the surrender of National Review to being the microphone handed to current Republican office-holders. Rather, it was this:
Back in the days of the Savings and Loan crisis, and again in the days of Freddie Mac and Fannie Mae, we saw lots of commentary from the right that the problems couldn’t be blamed on the free market. After all, in both cases massive moral hazard had been created by federal guarantees underwriting the debts, eliminating market discipline. Pains were taken to piously distinguish the free market from corporatism and corporate welfare (a distinction I take very seriously, I might add).
In the last two weeks, I haven’t seen any Republican official or Republican-leaning intellectual make the slightest reference to the problems with a system in which private lenders make risk-free profits by lending on the back of a federal guarantee. The indictment of corporate welfare has been nowhere to be found. The view that there’s something distinctively unproblematic about private lenders with public guarantees has been completely lost. And the (misleading) headline, the reference to a Soviet-style takeover, crystallized this for me. Since there’s been no crisis in student lending, no collapse of the system, the status quo ante has been naturalized; there are people on the right who think that the subsidized revenue streams to which lenders had become accustomed were a kind of property that has now been seized. The ex post commentaries on FSLIC and Franny and Freddie have been forgotten.
Jonathan Chait at TNR:
The old system consisted of guaranteed loans — the government would pay private banks to lend money to students for tuition, and guarantee their losses if the students defaulted. The system was naturally rife with corruption — lenders bribing college administrators to guarantee a chunk of the can’t-lose business — and shoddy customer service. President Clinton in 1993 introduced direct lending, where the government just lends money directly to students without a middleman. Direct lending made only partial headway, because the private banks were very persistent in their efforts to lobby or bribe colleges to maintain their business. Obama replaced all the guaranteed loans with direct loans, saving the government $61 billion over the next decade.
This is the reform conservatives see as a reprise of the Bolshevik revolution. The amazing thing is, they can’t even come up with a halfway-convincing fright scenario for this government takeover.
The beneficiaries of corporate socialism tend to be highly effective at convincing the conservative movement that policies that benefit their bottom line dovetail with conservative ideology. One of the guaranteed lenders is based in Tennessee and contributes to Lamar Alexander. Like most members of Congress, Alexander faithfully represents home-state business interests. Which is to say, the viewpoint of the guaranteed lending industry becomes Lamar Alexander’s viewpoint. And Alexander then transmits his opinions to conservatives via a stenographic interview with National Review. Thus the viewpoint of the lenders becomes the viewpoint of conservatives.
Stephen Spruiell at National Review:
I’m late getting to this post by Jonathan Chait on student-loan reform and the right’s “intellectual corruption,” but that is only because I am an irregular reader of TNR. And Chait, evidently, is an irregular reader of National Review Online. If he had been interested in discovering our viewpoint on the bill, he might have consulted our editorial on the subject, in which we explicitly addressed his argument (a variation on that hardy perennial, “conservatives are corporate shills”):
When it comes to student loans, liberals may ask why conservatives would support subsidies and guarantees for banks. The answer is: We don’t. By increasing demand for higher education without increasing the supply, the subsidies have driven tuition skyward. And by muting incentives for banks to lend intelligently, government loan guarantees have encouraged many students, including many for whom college might not be a good fit, to take on massive amounts of debt that they can neither repay nor retire through bankruptcy. The solution to this problem is to scale back subsidies for traditional forms of higher education while encouraging low-cost alternatives. Instead, the Democrats’ education bill would massively increase the subsidies while hiding their true cost. If that is the alternative, we prefer the status quo.
These days, preferring the status quo to Obama’s grand schemes can get you labeled a lover of corporate welfare, but guess what, liberals: With regard to student loans, you created the status quo! What you call “corporate socialism” (liberal fascism?) was originally your idea. (It almost always is.) Shouldn’t you be glad that we’re finally coming around to your side, even though you’ve moved on to bigger and . . . well, to bigger things?
My reason for preferring the status quo had mostly to do with this phony accounting: The Democrats’ new spending on health care and Pell Grants will materialize, even if the “savings” intended to pay for it do not. But I never defended the status quo on its own terms as, for instance, something we should prefer to scaling back subsidies for traditional forms of higher ed.
Of course, arguing that college loans should not be subsidized by the government is considered pretty radical these days. Another point I made during the student-loan debate is that it has demonstrated the process by which a basically conservative citizenry can be made to accept a much larger federal government. Step one, subsidize an activity through the private sector, gradually getting the public to think of the subsidy as an entitlement. Step two, get the government more involved through the direct provision of the activity. Step three, denounce the old subsidy as corporate welfare en route to arguing that the government should be the sole provider. If anyone counters that the government should stop subsidizing the activity, call him a radical (and possibly racist) throwback. If anyone tries to defend the status quo, call him a corporate shill.
Chait’s post nicely illustrates my poin
Sallie Mae closes call center in Killeen, Texas, eliminating 500 jobs, in the wake of the Democrats’ student-loan “reform,” which was packaged with the health-care reconciliation bill.
Pass the bill to find out what’s in it.
Well, yeah. When you cut back on a wasteful government subsidy, some of the beneficiaries of that waste will lose their jobs. Wasting tens of billions of dollars on loan subsidies in order to support call center jobs is a very, very inefficient way to boost employment. It’s funny to see conservatives turn into bleeding hearts when the victims are banks.
I will repeat (for the five readers who still care about this topic) what I wrote in this post: 1) Chait, despite having written a great deal on the subject, still does not understand how the old system worked (he thinks the banks were allowed to reap windfall profits when their borrowing costs fell; they weren’t). 2) Conservative opposition to the Democrats’ student-loan “reform” was rooted in our understanding that federal subsidies for traditional forms of higher-ed are mostly captured by universities and also hurt students for whom college might not be a good fit by encouraging them to take on massive amounts of debt they may never be able to repay. The Democrats’ student-loan bill entrenched and expanded a system that conservatives hate. That’s why we opposed it.
Chait links to a post in which I noted the loss of 500 jobs at a Sallie Mae call center. He writes, “Well, yeah. When you cut back on a wasteful government subsidy, some of the beneficiaries of that waste will lose their jobs.” No kidding? Really? Because when I wrote that headline alluding to the whole “created or saved” mantra, I wasn’t at all taking a jab at the kind of people who wrote long paeans to government waste back when the idea was to borrow and inefficiently deploy $800 billion in the name of boosting employment — e.g. “… if President Obama’s economic stimulus fails to prevent a depression… it will be because he didn’t waste enough money.”
Sarcasm aside, the Democrats’ student-loan bill did not eliminate a wasteful government subsidy. It took money being used inefficiently and put it toward another inefficient use. Democrats overstated how much their reforms would save and then used the savings to expand subsidies for traditional forms of higher-ed. Conservatives opposed both the accounting trickery and the expansion of subsidies, thus we opposed the Democrats’ student-loan bill. This is really very easy to understand, but Chait has settled into a nice rhetorical groove on this subject and finds it useful to continue to misunderstand on purpose.
Barron Young Smith at TNR:
First off, in his recent post on the subject, Spruiell complains that Chait has mischaracterized his position. If he has, that’s because the position is terribly convoluted. On the philosophical level, Spruiell justifies supporting this policy he doesn’t support by posing as a tragic ambiguist: “When it comes to student loans, liberals may ask why conservatives would support subsidies and guarantees for banks. The answer is: We don’t. … [T]he Democrats’ education bill would massively increase the subsidies while hiding their true cost. If that is the alternative, we prefer the status quo.”* In a fallen world, where government has already extended its tentacles into the realm of providing financial support for kids who want a higher education, the least-bad option is to simply defend the existing arrangement. Ok, that’s certainly one way to think about it, although it makes Spruiell not so much truly conservative as merely reactionary. But then, in the course of defending this status quo, he has to justify the old program on its objective merits. Since there basically aren’t any, he proceeds to slice the salami very thin indeed.
Here’s how. On the policy level, Spriuell writes as if he objects to Chait’s perspective on student loans, but when you look more closely, he out-and-out admits that they’re on the same page about the uselessness of the bank subsidies, saying, “I never defended the status quo on its own terms.” In fact, the only substantive complaint that Spriuell decides to hang is hat on is cost: Obama’s student-loan plan expanded Pell grants at the same time that it cut bank subsidies, and Spruiell argued that the savings wouldn’t be big enough to cover the new spending. “My reason for preferring the status quo had mostly to do with phony accounting,” he writes. The problem is that (a) His complaints about phony accounting don’t make sense even on his own terms, since according to his own preferred estimates, rather than the ‘tainted’ original CBO score, he found that student-loan reform would STILL save $28 billion dollars more than the status quo; and (b) If he’s sincerely representing his position, then this isn’t a clash of philosophies—it’s simply an argument about budget numbers. Presumably, if this is Spruiell’s only complaint, he’d support a student-loan bill that promised to boost Pell grants only in proportion to whatever savings come from the bill, or didn’t boost them at all. Since Chait’s something of a deficit hawk, and his main complaint about the old student-loan system revolved around the stupidity of government waste, he would back such a bill as well (I just asked him). So what’s the big disagreement about?
Additionally, Spruiell takes Chait to task on two other wonky points which have little bearing on the fundamental soundness of student-loan reform, and gets his interpretation of them wrong. First, he complains about the way Chait used an example that came from Senator Lamar Alexander, who opposed student-loan reform: “[T]he government is charging 2.8 percent to borrow the money and 6.8 percent to lend it to the students, and spending the difference on the new health-care bill and other programs.” Chait wrote that, as long as we’re making loans, the difference between these rates is going to be spent one way or another, and this way it is funding the government, while under the old program it was pocketed by banks. “Not true,” Spruiell writes, and then explains that neither the government nor the banks are able to pocket that entire amount. Instead, under the old program, the banks are guaranteed a fixed percentage at all times on any student loans that they sell, but they have to remit money to the government when credit conditions cause their take to go beyond that percentage. Ok. But the point here is that banks are guaranteed a fixed percentage on any student loans that they make. That’s free money at near-zero risk. Spruiell makes it sound like this somehow disproves Chait’s point, but the two margins being described are the exact same thing: Additional money that the government gives to banks for their own uses, which would not be wasted after a switch to direct-lending.
Second, Spruiell plays up the fact that Jason Delisle, the budget expert at the New America Foundation, thinks the student-loan bill was originally scored in a way which hides hidden costs to the taxpayer. But when I contacted Delisle, he said this was a misinterpretation. Both programs contained the same ‘hidden costs,’ yet direct-lending was still vastly cheaper than the old program. “As far as hidden costs go, both programs have hidden costs. When Senator Gregg, supported by National Review, asked for a private market estimate of the costs of the two programs, and said that rules for estimating don’t take into account market’s value of risk, the score came back and it said, yeah, both programs cost a lot more than we thought, but there’s still a gigantic difference.” So student-loan reform is cheaper than the status quo was. Period.
Ultimately, though, I’m not sure why we’re still having this debate. Obama’s success in passing student-loan reform has put both TNR and National Review exactly where we’d each like to be: Spruiell no longer has to defend a messy public-private boondoggle, and his magazine is free to enjoy the philosophical purity of railing against a student-loan program that is purely government run. And us? Well, we’re happy because we won.