What do you do when everybody hates you? Well, if you’re a Congress with historically low 11% approval ratings, you deflect. Find someone more reviled than you. Fortunately, there is such a group – the bankers who make student loans.
Guaranteed student loans were historically made by private lenders who were indemnified against some risk of default by the federal government. Uncle Sam also reduced interest rate risk caused by making long-term loans at below-market rates. In 1993, the federal government began to compete with the private lenders by working through colleges to provide direct loans. Even so, as late as 2007-2008, the feds directly issued only 22% of guaranteed student loans.
With the healthcare reconciliation bill, which includes a provision reforming the student loan industry, private lenders will be eliminated beginning with the 2010-2011 school year. According to the President, reform will save $68 billion over the next decade.
Now, I’m all for government trying to save a little money. I can also work up as much animus towards fat-cat bankers as the next guy. That being said, I do have several problems with this particular reform.
No self-respecting sausage would want to be made like this legislation – attached to the fix of an unpopular healthcare bill. I’m also skeptical anytime the government projects more than one day into the future (think Social Security, Medicare, GDP growth, interest rates, unemployment, prepaid tuition plans, etc.). For student loan reform, the Congressional Budget Office adjusted the savings estimate (downwards of course) four times since February 2009. The CBO’s current savings estimates are a third less than its original 2009 tally.
In a July 2009 letter to Senator Gregg, the CBO said a different set (of perhaps more realistic) assumptions could lower savings even more. Of course, our government already has designs on spending the higher projected savings amounts.
Maybe our healthcare and student loan systems are both sick – but it doesn’t seem like operating on both at one time is the best way to heal either one.
