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Tilting at Windmills

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June 19, 2007
By: Kevin Drum

FREE MARKET FOLLIES....Back in the early days of his presidency, Bill Clinton introduced legislation to reform the federal student loan program. Instead of the feds setting interest rates and guaranteeing loans made by private banks — hardly a paradigm of the free-market in action in the first place — why not just cut out the middleman and have the feds make the loans directly?

It was a good idea and in 1993 the Direct Loan Program was duly created, but more than a decade later 75% of student loans are still made via the old subsidized system. Why? Are private lenders more efficient after all? Hardly. The subsidized loans are unquestionably more expensive for the government, to the tune of nearly $3 billion a year. As Jon Chait explains, the reason for the continued popularity of the subsidized system is a little more prosaic:

It now turns out that the private lenders' success came not through superior efficiency but through superior graft. The emerging college-loan kickback scandal is a vast scheme by private lenders to bribe colleges into foisting their services onto students. Lenders plied college-loan officers with meals, cruises, and other gifts. Some loan officers were given lucrative stock offers.

....The very thing that drove conservatives to oppose Clinton's reform — the vast private profits made available by guaranteed loans — is what enabled the scandal. Almost any government program creates at least some potential for cheating. The hallmark of the conservative approach is that the scale of the profits is so huge. Sallie Mae, the largest student lender, was recently sold for $25 billion.

The old system was created in the 60s, when existing banks were the only reasonable way to originate loans in large quantities. Since then, technology and capital markets have both evolved tremendously, making the direct loan program possible. It's also made the loans much cheaper for banks to administer, and the combination of 60s-era government subsidies and 90s-era capital market efficiency has made the student loan business very lucrative indeed. It's no wonder that neither the financial industry nor the members of congress they donate money to want to do away with it.

As a result, a toxic combination of conservative true believer-itis in free markets (the stated reason) and old-fashioned corruption (the real reason) costs the taxpayers about $3 billion per year. For just this one program. Welcome to right wing America.

Kevin Drum 2:00 AM Permalink | Trackbacks | Comments (38)

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This is hardly a scandal, given that the big holdup in Iraq is that the Maliki government, such as it is, has not been able to pass a law, one that GWB says it must, that gives 80% of future oil profits to foreign (read American) oil companies.

At least 3100 of our men and women did not die in this petty student loan scandal.

Kevin you are slipping in your unique abilities to write about what is really important.

Posted by: gregor on June 19, 2007 at 2:07 AM | PERMALINK

free-market, good!
government, bad!

nay, whinney!

Posted by: craigie on June 19, 2007 at 2:15 AM | PERMALINK

Student loans have become a joke. We're better off getting a home equity loan and deducting the interest than getting a student loan for our daughter, with interest at 6.8, and which has to be paid upon disbursement. Plus we can only get $3500 from the Stafford loan program, which hardly makes a dent in tuition costs. The rest would have to come from a much higher interest loan program.

Posted by: KathyF on June 19, 2007 at 2:42 AM | PERMALINK

I was going to point out that it isn't just that the government pays more than under the direct student loan programs, the students generally get stuck with worse rates and less favorable terms.

But KathyF seems to have made that point already.

Posted by: tanstaafl on June 19, 2007 at 2:43 AM | PERMALINK

gregor, don't let the awfulness of the Bush government recalibrate your ideas about what's a real scandal. It's a real scandal if it would have been a real scandal had it happened in the real-scandal-free (albeit Starr-studded) nineties.

It just means you have to acknowledge the existence of real scandals that look like small change in our current environment, and the existence of more real scandals than even an honest press could cover at once. It doesn't mean they're not real scandals.

Posted by: derek on June 19, 2007 at 2:50 AM | PERMALINK

Welcome to George W Bush capitalism: privatize the rewards, socialize the risks.

Posted by: astrid on June 19, 2007 at 7:49 AM | PERMALINK

The game is rigged.
The deck is stacked.

Other news at 11.

Posted by: Buford on June 19, 2007 at 9:19 AM | PERMALINK

Kevin, I think you may be conflating or confusing different types of loans and their "costs" to the taxpayers.

Perkins loans, which come from a revolving fund administered by the schools, can be said to "cost" tax dollars in that they are used as incentives to encourage students to go into certain fields, such as Nursing, Science teaching, teaching in at-risk schools, and a few others (which change over time). The incentive is that the loans can be paid off by the government if the borrower goes into and stays in those fields. Most of the rest of the costs of the program are absorbed by the schools that award the loans. These loans cannot be discharged through bankruptcy, so the fund stays pretty whole.

So, what is the current regime doing about that? They're talking about taking back all the revolving fund, giving it away in the form of Pell grants (which the estimates say will last 4 years), and ending the program. Clever! Conservative! Creates a great student funding crisis to the next administration! Yay!

But anyway, I think you might be summing the costs of both Stafford (the kind of loan the banks lend) and Perkins (the kind the schools lend, collect, and lend again, over and over).

Posted by: Kevin (a different Kevin) on June 19, 2007 at 9:25 AM | PERMALINK

This piece should be printed, framed and put up on your wall. It is classic modern American conservatism in action; the reasoning, the implementation and the results.

This is your country.
This is your country on conservatism.

Any questions?

Posted by: Northern Observer on June 19, 2007 at 10:00 AM | PERMALINK

So, what we need is ... ?

The US government is terribly in debt, so don't look for it to fund any schooling.

The American people can't afford it because the schools just keep increasing their costs (as do all retailers) every time they can.

Solution: less government funding to balance the books and less students going to school and schools decreasing costs to ensure they keep up the number of students (or increasing their costs yet again, as many failing companies do, to ensure continued profits even as they 'sell' less services).

Political fallout: Anguish, liberal activists scream that everything isn't free, conservatives scream because they aren't making enough money, kids don't get as educated

But, it is what we can afford. That's what happens when you actually pay your bills instead of borrowing until you go bankrupt.

If Bill Clinton's administration did this and Hilary is claiming half credit for everything during those 8 years, I wonder if she'll claim credit for screwing this up.

Posted by: MarkH on June 19, 2007 at 10:00 AM | PERMALINK

Very stupid and short-sighted, MarkH.

The government is always in debt. Bankruptcy for the Federal Government is NOT a possibility. The rules they operate under are substantially different than those businesses and private persons must follow. That debt is FAR from the worst problem the government faces.

The country is going the wrong way. We're losing leadership roles we once had in many fields. Failing to invest in the future of the country by refusing to educate its citizens is guaranteed to increase the rate of decline.

If the purpose of the government is "to promote the general welfare" (I read that somewhere), funding education is, and must be, a priority.

Conservatives be damned. They DO NOT have the best interests of the nation in mind.

Liberals be damned when they forget that the best interests of the nation are inextricably tied to the best interests of the individual citizens.

Posted by: fumbus on June 19, 2007 at 10:26 AM | PERMALINK

Maybe that explains why my mom called the financial aid office several dozen times about my sister's tuition at New Paltz and was offered a loan each time, even though several times during the same call she insisted she wanted to just send a check in for the remainder of the balance.

Posted by: Brian on June 19, 2007 at 10:27 AM | PERMALINK

I still don't understand why higher education has become so insanely expensive. For an undergraduate education, especially in liberal arts, all you need to educate 500 kids would be a block of class room and 15 associate professors at $40-60K/head + 10 parttime professors who would teach for peanuts just for the prestige. Add in a couple of online databases, 2 IT staff, 2 research librarian, 5 secretaries, and a handful of student research assistants. Everything else is extraneous.

My alma mater says it spends over $70K per student/yr. How much of that is for layer upon layer of highly paid administrators? These schools are doing their students a horribly disservice by putting them deeply in debt. The system is being captured for the benefit of people who have virtually nothing to do with education.

Posted by: astrid on June 19, 2007 at 10:47 AM | PERMALINK

The government made student loans undefaultable. They are, sans a pauper's death, completely guaranteed. THAT'S why banks are eager to make those loans: Uncle Sam has become the world's biggest loan shark. Among many other things that are a disgrace and why this country is no longer recognizable.

Posted by: Jeffrey Davis on June 19, 2007 at 10:58 AM | PERMALINK

astrid, in theory, yes, all education takes is a classroom, a gifted teacher and a pool of serious students. Jeez, why stop there? Why have brick and mortar institutions of higher education at all? Why not YouTube videos with celebrity lecturers, a reading list and chat rooms? That would be cheaper yet. Or University of Phoenix? Why not go that route? Let higher education be entirely delivered via the internet, and let the researchers dedicate themselves entirely to research.

Or maybe we should abolish research altogether because all researchers come up with is bad news. It's always just global warming this, mass epidemic that.

Posted by: PTate in FR on June 19, 2007 at 11:23 AM | PERMALINK


Research is not funded by tuition but by grants, so it shouldn't figure into the cost of higher education one way or the other.

I see the value of a college campus come from young people living 24/7 amongst peers and away from parents. However, given the prevalence of social networking and SLers, maybe we can just set up a university in Second Life, pot bongs and all.

Posted by: astrid on June 19, 2007 at 11:44 AM | PERMALINK

I think the bigger underlying problem is that we continue to treat education in this country as a privilege, not a right.

Why I'm not sure, since a well-educated populace can only lead to a society that is more informed, more financially secure, and able to lead the world in many different industries.

Granted, not everyone can be an accountant or IT pro when they grow up, but a nation of service industry workers isn't exactly ideal.

Posted by: Mark D on June 19, 2007 at 12:07 PM | PERMALINK

There surely must be some confusion over just what a subsidized loan IS, if people are so confused over why they are more popular than unsubsidized loans.
Subsidized loans are more popular because they are subsidized. Period. A subsidized loan gives the borrower a lower interest rate. Why would I borrow money at a higher rate, when I can borrow it at a lower rate?

Posted by: charlie don't surf on June 19, 2007 at 12:12 PM | PERMALINK

Kevin: "Welcome to right wing America."

Two congressmen -- one a liberal Democrat and the other a conservative Republican -- were walking to lunch together along a downtown Washington street, when their heads were both quickly turned by an extraordinarily beautiful woman walking by them in the opposite drection.

Once the woman was farther down the street and safely out of earshot, the Democrat shook his head in mock disbelief and said to his colleague, "Damn! Wouldn't you just love to screw someone like her?"

"I sure would," replied the Republican. "But out of what?"

Posted by: Donald from Hawaii on June 19, 2007 at 12:27 PM | PERMALINK

In the Sixties and Seventies there was a lot more money for education. Many students had grants and there were also students who were subsidized by the GI Bill. This money allowed the students the time to protest the war in Viet Nam. Since then, there are far fewer ex-veterans, and almost all students now have loans instead of grant monies, which might explain why there are not young people out on the streets fighting against the war. They are too busy working.

Posted by: Brojo on June 19, 2007 at 12:30 PM | PERMALINK

Most Right Wingers love of a "Free Market" system is simply mouth service. They love anything that allows them another chance to profit. Period.

My favorite cynical indictment of free market economies comes from Greg Brown:

there'll be one corporation selling one little box it'll do what you want and tell you what you want and cost whatever you got
"Where is Maria"

Posted by: Simp on June 19, 2007 at 12:46 PM | PERMALINK

Not sure I buy that the bank participation was ever necessary. I got some of the last NDSLs (National Direct Student Loans, previously National Defense Student Loans) in the early 70s. The college's financial aid department had a budget of them to give out, they funded the loan out of it, it showed up on my tuition statement, they reported to whoever did the loan servicing after I left. No bank involved, seemed efficient enough. (On the silver lining front, the 100% inflation over the the next decade sure helped pay that loan off...)

Posted by: Rich McAllister on June 19, 2007 at 1:36 PM | PERMALINK

The healthcare and education high cost/high dissatisfaction malaise is typical of a country that can't even deal with its insane suburban deer overpopulation. America doesn't really have the will to do anything anymore, no matter how basic and commonsensical.

Maybe it's time to bring in that Jeffersonian revolution, before it is turned into imperial Rome...or Pakistan.

Posted by: astrid on June 19, 2007 at 1:58 PM | PERMALINK


We're better off getting a home equity loan and deducting the interest than getting a student loan for our daughter, with interest at 6.8,...

Unless you are lying on your home equity loan application and willing to risk prosecution for tax evasion, interest on home equity loans for this purpose are not tax deductible. Only if the use of the equity loan is for home improvement is the interest tax deductible.

You'd have to refinance your home entirely and then use part of the proceeds in lieu of a student loan in order to have the interest be tax deductible.

Posted by: Edo on June 19, 2007 at 7:53 PM | PERMALINK

Fortunately, in socialized nations where the government runs everything, corruption is almost unheard of.

Posted by: dnc on June 19, 2007 at 11:11 PM | PERMALINK

It's certainly not as widespread and pernicious there as it is here, dnc.

Posted by: fumbus on June 20, 2007 at 9:38 AM | PERMALINK

"his is hardly a scandal, given that the big holdup in Iraq is that the Maliki government, such as it is, has not been able to pass a law, one that GWB says it must, that gives 80% of future oil profits to foreign (read American) oil companies."

any documentation? i.e. proof?

No? Didn't think so.

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