With the recent vote AGAINST college students and FOR loan industry subsidies as well as the LTE written by Bob Hill exposing the vote, Michele Bachmann is going to have some serious explaining to do in regards to this issue. An article in the L.A. Times might be just the suggested reading Michele needs to realize how foolish she looks with this vote.
Check it out:
The GOP's fuzzy math on student loans
What are Republicans protecting when the government can lend money at half the cost?
By Michael Kinsley
September 15, 2007
If you know anything at all about the federal student loan program, you will not have been surprised by the scandal of recent months. The only amazing thing is that it has taken so long to arrive. Here's how the program works: Banks and other private companies lend money to students. The federal government pays part or all of the interest -- currently 7% or 8%. The government also guarantees the loans.
What is wrong with this picture? Well, the government itself borrows the odd nickel to finance the national debt. This borrowing, obviously, is also guaranteed by the government. For that reason, it carries an interest rate of only 3% or 4% If the government can borrow money at 3% or 4%, why should it be paying 7% or 8% for the privilege of guaranteeing loans to someone else? Wouldn't it make more sense for the government to loan out the money itself?
That is the $4-billion question (the approximate annual cost of the interest subsidy). And the answer is: Of course that would make more sense. It is what any levelheaded businessperson would do. And what is stopping the government from behaving like a levelheaded businessperson? Not those head-in-the-clouds Democrats. It's the Republicans, who adopted the student loan "industry" in its infancy, like a stray cat, and have nurtured it ever since.
There actually is a parallel student loan program that does use government funds. It was started in the early days of the Clinton administration. It costs less to operate, and it has not been tainted by scandal. But when the Republicans regained control of Congress in 1994, they pushed through a law forbidding the Education Department from encouraging use of this program. As a result, direct federal loans account for only 25% of all student loans.
There is plenty of other encouragement going on. New York Atty. Gen. Andrew Cuomo has extracted fines of more than $1 million each from such prestigious institutions as Columbia and Johns Hopkins -- and, for that matter, nearly as prestigious institutions such as Citibank, JP Morgan Chase and Bank of America. It seems that kickbacks were being paid to university financial aid officers who delivered customers. Some of them even got stock in some of the more specialized, and dubious, student loan companies. When the government is giving away free money -- which is what the program amounts to (and I mean giving it away to the banks, not to the students) -- it's worthwhile to get cut in on such a good deal.
When the student loan abuse story broke, fingers were pointed at the Education Department, which is supposed to supervise the program. The Government Accountability Office minced no words. It called on the department to "develop a protocol to determine the appropriate level of response for cases of noncompliance and assess the effectiveness of these actions to inform and improve this protocol." Wow. While the Education Department quaked in its boots over that one, Congress more usefully passed a bill substantially reforming the student loan program and cutting the subsidy to banks and other loan providers by 80%. President Bush, to his credit, will sign these reforms into law. In fact, he actually proposed some of them in his budget last February. But this puts him at odds with his party.
The student loan "industry," as it is comically referred to in the newspapers, is an interesting case study in politics and business. To start, it is hardly an industry. There are no factories. The only things it "makes" are loans. Furthermore, it exists only because of a government program. Yet in the four decades since the federal government started it, the student loan business has evolved into a pretty good imitation of an industry, with trade associations, lobbyists and support from politicians, mostly Republicans.
This "industry" is so dependent on the goodwill of politicians, in fact, that the reform bill alone may be enough to queer the deal in which its biggest player, Sallie Mae, is supposed to be bought by a private equity firm for $25 billion. Even before taking over, the private equity firm booted Sallie Mae's chief executive on the explicit grounds that he did not have good relations with Democrats. To run this so-called company, in other words, you don't need to know how to make widgets, or even how to make loans. You just need to know how to make nice. But don't feel too bad for this executive who suddenly found his Rolodex obsolete: He made $40 million last year and will get millions more if the deal does go through.
But why do Republicans love student loans? Oh, in part the usual reasons: lobbyists and campaign contributions. There is almost sure to be at least one of these firms in your district -- the local bank, if no one else. But there is more. Student loans are the clearest example of the common Republican confusion between free-market capitalism and business. Capitalism is an economic system that is held, with some justification, to be the best guarantor of prosperity. Business can be capitalism in action, or it can be something entirely different. There is very little about the student loan program that has anything to do with free-market capitalism. Yet whenever the student loan system comes under criticism, lobbyists, "industry" leaders and supportive politicians haul out the same old cliches as if they were defending Adam Smith's famous pin factory itself.
During the recent reform bill debate in the House, for example, a Republican from Texas, Jeb Hensarling, declared that the very notion of reducing the subsidy to private companies was "all part of a Democratic tax-and-spend program."
A so-called analysis by an industry expert, which (according to the Washington Post) circulated on Capital Hill during the debate, worried that the big boys would survive but the subsidy reductions "may leave smaller lenders unprofitable." Concern for "small lenders" was a common theme, as if a loan from a ma-and-pa bank, if such an institution exists, would be warmer and more cuddly than a loan from Citibank. Another common theme was that the subsidy cut was part of a covert Democratic effort to drive people into the direct federal loan program -- or, as one lender chief executive described it, the "one-size-fits-all direct-loan program."
This would be no bad thing, but it doesn't seem to have been the case. I'm not sure what "one size fits all" means here, but if it refers to the interest rate that students and their families have to pay, it's true that there is only one rate in the government program, compared with many in the private one -- all of them higher. But maybe there are people for whom the variety is worth it.
Michael Kinsley, a contributing editor to The Times' opinion pages, is the paper's former editorial page editor. He is also the former editor of the New Republic, Slate and Harpers.
