Last year Congress cracked down on banks making too big a profit off of student loans. Democrats were delighted to stop rapacious lenders like SLMA from taking a pound of flesh from America's students. Speaker Pelosi was so proud of the bill that she even convened a photo-op intended to make it look like a presidential signing ceremony, and then instructed people to applaud (around 1:56).
The only problem with slashing the rate of return on student loans? Lenders are now losing money hand over fist. Sallie Mae continues to write loans in the hopes that Congress fixes the mess it created, but many other banks have dropped the business entirely.
Congress is frantically trying to enact a fix before May, when many college-bound students will be submitting loan applications. But rather than admit their error and repeal the bad bill they passed last year, Democrats in Congress are getting ready to craft a bill that provides taxpayer subsidies to hurting lenders:
Usually, the law of unintended consequences takes so long to reveal itself that no one remembers the culprits. But the speed at which Congress's student lending changes have gone south is raising political danger for Democrats, if Republicans had the wit to point it out. (They don't; that's why they're Republicans.)...
The result is that the same man who authored last year's bill to cut lenders' returns has crafted a new bill to subsidize those same lenders. Last week the House passed Education and Labor Chairman George Miller's latest foray into collegiate finance. The bill gives the Department of Education new authority to purchase loans directly from lenders.
To summarize: Congress mandated a return on student loans that is too low to attract private capital in the current market. So Congress will now use your money to create artificial investor demand. Taxpayers will bear more risk so that Congress can fashion a new business model to replace the one it just destroyed. The Bush Administration, unwisely but typically, has endorsed this approach.
The hypocrisy defies belief. And it gets worse when you realize that Congress is also trying to convince the Fed and the U.S. Treasury to take on these nonperforming student loans, even as they criticize the Fed for accepting bad mortgages. It seems the essential difference is that if the Fed puts itself on the hook for the student loans, at least the Senate might not look so bad. Not to worry though -- at the end of the day it'll all be papered over with a little more taxpayer money.
