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Race to the Bottom

Obama’s deeds belie his words on school reform.

Mar 29, 2010, Vol. 15, No. 27 • By MARY KATHARINE HAM
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But while Democrats subject the Opportunity Scholarships to a slow death, they’re working with the administration to fast-track a bill that would nationalize federally guaranteed student loans made through private lenders, turning them into direct loans from the Department of Education. It’s the “competitive nature” of “Race to the Top” that Obama insisted makes it effective, but when it comes to student loans, private competition is the “middle man” to be eliminated.

Secretary Duncan sent a letter to college officials in October telling them to prepare to make the switch to direct loans in the 2010-11 school year, even though the bill’s passage was still in doubt. It passed the House, but was unlikely to earn a filibuster-proof majority in the Senate. The measure has now been added to the health care bill, guaranteeing that it will get very little attention in the run-up to a vote. California Polytechnic State University, which transitioned to the direct-loan program this year, has already reported delays in financing that sent students to class without books for four to six weeks. Your government in action.

The federal student-loan takeover is the archetype of a government program’s inexorable creep, and should serve as a warning about the direction Obama wants to take education and health care alike, his rhetoric about competition and thwarting special interests notwithstanding. A “Stafford Loan” program created in 1965 to allow students to borrow money cheaply with a government guarantee begat a program where loans made by private lenders were transferred to the government’s books, which begat artificially better budget numbers by eliminating actors subject to the risks and fluctuations of the market. That program begat a Clinton initiative—a direct loan program as an alternative to federally subsidized loans made through private banks—a “public option,” if you will—which was supposed to beget more competition. Responding to incentives and crowded out by government programs, unsubsidized private operators now make up only about 14 percent of the student loan market. Still, Obama remains determined to eliminate messy profit-makers from the business in the interest of savings .  .  . which he has already spent on health care.

Senator Lamar Alexander complained in a statement that the

federal government will borrow money at 2.8 percent and then lend it to students at 6.8 percent. .  .  . The government—instead of using that money to reduce costs for students who are borrowing the money—will use it to pay for more government programs. According to the preliminary CBO estimate produced this morning, the new bill will take $9.1 billion over 10 years from students’ interest payments to pay for this health care takeover.

In yet another Cornhusker Kickback moment, an earmark in the reconciliation bill allowed just one North Dakota bank to continue federally guaranteed lending, but this caused enough controversy that its beneficiary, Senator Kent Conrad, asked to have it removed so as not to derail the train to health care reform.

“We negotiated this in good faith months ago,” Conrad told Roll Call. “But it’s not worth it. It’s not right that it be used to misrepresent this package.” The amount of that one earmark was $50 million, roughly three times the amount needed to fund the D.C. Opportunity Scholarship program for a year. 

It’s stories like this that make you wish there were, somewhere in the federal government, a prominent, reform-minded lover of educational innovation and programs that work who could “negotiate in good faith” on behalf of low-income children like those in Washington, D.C.

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