Student Loans: Your Model for Government Take-over of Health Care

I recommend Stephen Spruiell's piece in its entirely. Wading through the acronyms is worth it to learn the illuminating history of the federal government and the student loan sector. Here's the short version.

In 1965, Congress created a government-guaranteed loan called the Stafford loan, which subsidized risk for banks when their borrowing costs were high, and kept student loans at an artificially low, steady interest rate.

When interest rates were down, banks had to send their profits on student loans back to the government in exchange for their protection from risk.

Then the federal budgeting rules changed, forcing Congress to come up with an accounting gimmick to obscure all the money this subsidizing was costing them, so they could then spend that money on other things.

Being crafty in the practice of creating fake money numbers (that's a technical term), they decided it would be better to take on all those student loans, straight through the government:

The Democrats argued that this would produce real savings by cutting out private-sector middlemen. In fact, the bulk of the projected savings were fictitious, resulting from the accounting change. To understand how this worked, consider the structure of the interest-rate insurance provided under FFELP. In exchange for insulation against interest-rate spikes, private lenders give up their ability to make windfall profits on student loans when their borrowing costs fall. The government doesn't have to make that trade; if interest rates drop, it can keep all the profits. This means the Congressional Budget Office can use rosy interest-rate scenarios to project large savings.

Republicans blocked this effort in the early '90s, and Democrats responded with a "public option" for student loan financing:

In 1999 (the fifth anniversary of the program), Deputy Education Secretary Marshall Smith said, "Guaranteed lenders have responded to the Direct Loan Program by improving their service. . . . Students and schools are served by healthy competition in student loan programs, which has created marketplace incentives for both programs to improve." Sound familiar?

Indications are that the "public option" (FDLP) doesn't work very well (surprise!), and students are choosing private companies that have an incentive to give them good customer service over federal bureaucrats.

The FDLP's share of new federally backed loan originations peaked at 30 percent right after it was created and has fallen steadily to 20 percent since then.

Enter the Obama administration, which argues (in the same way Dems did in the '90s) that "savings" could be realized by eliminating choice altogether (the same "choice" that was the justification for the government-run option) and fudging the numbers, as the government can easily do because it does not have to show a profit to anyone, ever:

Now that the government's borrowing costs have fallen and the deficit has swelled, the Democrats have dropped the pretense of caring about consumer choice. "Healthy competition" is now a bad thing; their argument is that the FFELP should be eliminated and the "savings" spent elsewhere.

End game: