The Truth about the Public Option
It's a Trojan horse -- just look at student loans.


Stephen Spruiell

When will the press notice President Obama’s hypocrisy when it comes to the “public option”?

Speaking at a community college in Troy, N.Y., on Monday, Obama slammed the banking industry for opposing his education bill, which passed the House last week. The bill would change the way the government subsidizes student loans. Under current law, the federal government insures banks against losses on the fixed-rate student loans known as Stafford loans. The government also pays banks a subsidy on these loans to offset their capital costs. In addition, the government offers a “public option,” under which students can borrow directly from the government at the same rates.

This option has been available since 1993, but students and universities overwhelmingly prefer the banks: The government’s share of new federally backed loan originations peaked at 30 percent right after the direct-lending program was created and has fallen steadily to 20 percent since then.

Obama wants to change that by making the government the sole provider — the “single payer,” if you will — of all federally subsidized student loans. He couches this policy change as cutting off an “unwarranted subsidy for the big banks.” So far, however, the press has failed to make the connection between this rhetoric and Obama’s pitch for health-care reform. The changes he wants in health care would make the market for health insurance look a lot like the market for student loans.

If Obamacare were to become law, everyone would be required to purchase a health plan. Those who couldn’t afford one would get a subsidy. Obama also wants to create a government-run public option so that people could purchase health insurance directly from the government. He says this would promote competition and keep the private insurers honest — which is exactly how Democrats defended the public option in student loans when it was created.

So let’s compare: Obama’s health-care plan would create a subsidy for private health-insurance companies akin to the subsidy for banks that he now calls “unwarranted” — the only difference is that the health-insurance subsidy would be delivered indirectly, by requiring people to purchase care and then paying for those who can’t afford it. Obama’s health-care plan would also let employers and individuals choose between private insurance and a public option, akin to the one the Democrats set up for student loans in 1993.

Here’s the question the press should be asking: If Obama thinks this arrangement is such a wasteful and inefficient way to subsidize student loans, why does he want to make it the way we subsidize health insurance? First, Obama is right to point out that subsidizing student loans costs the government a lot of money. But cutting out the banks merely allows the government to use accounting gimmicks to hide the costs.

Meanwhile, the subsidies are captured by the universities in the form of ever-rising tuition. Whether the government insures banks against default or, as Obama’s bill would do, directly assumes that risk, students who might not be good candidates for college are nevertheless approved for large amounts of financing. The resulting increase in demand has driven the cost of higher education skyward; worse, it has encouraged students to take on enormous debt loads that, depending on their aptitudes, they might not be able to repay. This is one lesson we can draw from the world of student loans and apply to Obama’s health-care plan: Government subsidies drive costs up, not down.

Another, even more important lesson to be drawn is this: “Public options” are Trojan horses for nationalization. Obama’s position on the public option for student loans and his position on the public option for health insurance are directly at odds. Why won’t anyone in the press call him on it?

Stephen Spruiell is an NRO staff reporter.