The Magazine

Need a Student Loan?

Boy, does Uncle Sam have a deal for you.

Aug 3, 2009, Vol. 14, No. 43 • By ANDREW FERGUSON
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The House Committee on Education and Labor is having a busy summer. (Everybody in Washington is having a busy summer!) Earlier this month, for example, one of its essential subunits--the Subcommittee on Early Childhood, Elementary and Secondary Education and Healthy Families and Communities, or SECESEHFC--held lengthy hearings to determine new ways the United States Congress might accomplish one of its many important goals: the "Prevention of Bullying."

The subcommittee chairman, a congressman named Kildee, from Michigan, pointed out that last year, fully 75 percent of schools in the United States had reported an incident of bullying or worse.

"One incident is one too many," Kildee said, thoughtfully if not originally. "We must do something immediately to address this widespread problem."

With the "prevention of bullying" safely in the solution pipeline, the committee went on to do something immediately to address another widespread problem. Apparently college students are getting private loans to fund their education. Last week the committee approved a bill that will put an end to all that.

The committee's vote accelerates a process that was begun under President Clinton. In 1994, Congress approved his idea of a Direct Lending Program for students who needed to borrow money to go to college. Before then the government had merely guaranteed student loans, which were originated and serviced by private banks selected by the government. The guarantee ensured that the "private" loans made huge profits for the banks, regardless of interest rates or default rates.

Guaranteed loans are a textbook example of crony capitalism or (if you prefer) corporate socialism: The government assumes all the risk while doling out contracts to favored businesses, who then reap the profits. With student loans, the lender gets preening rights in the bargain, marketing itself as a Merchant of Dreams, a benefactor of America's youth, a sweet-tempered Mr. Jaggers to a nation of eager Pips. In truth, the only people who like the system of guaranteed loans are the student loan industry--now handling more than $90 billion a year--and the congressmen whose districts contain large numbers of people who work in the student loan industry.

Direct lending eliminates these unctuous middlemen by encouraging students to borrow money directly from the federal government. The program semi-satisfies libertarians, who dislike cronyism, and thrills liberals, who believe the noble goal of universal college education should be uncorrupted by the yuckiness of money making. Liberal backers of direct lending believe, in effect, that there's room for only one Merchant of Dreams around here, and it better be the federal government. Moreover, direct lending saves the government money--no really, it does--by reducing fees and other handling costs, savings which can then be passed on to the poor borrowers, though they never are.

The bill that passed out of committee last week completes the triumph of Clinton's program. The grandly titled Student Aid and Fiscal Responsibility Act of 2009 does away with the federal guarantee for student loans and brings them all under the care of Congress and the federal Department of Education, saving (say the committee's accountants) nearly $10 billion a year. The committee plans to rechannel more than half those savings to purposes other than financing higher education. But for a college student trying to make tuition, the most dramatic consequence is that federal direct lending will soon be the only kind of lending there is. Washington will be the lender of first and last resort.

Some students--or more likely, their parents--still take out private bank loans with no federal guarantees. This accounts for about 14 percent of the student loan market. But it's unclear how long that corner of the market can last, as the federal government slowly crowds out truly private lenders by offering customers lower interest rates, greater discounts, and easier eligibility rules. Most likely the private lenders will abandon the field altogether, and the last chance to build a genuinely competitive market in college loans will be lost.

Few will weep over that vanished opportunity--until, perhaps, they see what Congress does with the new power that has fallen into its lap. For whatever else the monopoly in direct lending accomplishes, it will greatly expand the number of young people who find themselves entangled with, and ultimately beholden to, the vast system of rewards and rebukes that the federal government has at hand. More than 65 percent of college students borrow money to go to college. That's a lot of guinea pigs.