There is something poetic about the Democrats’ plan to combine the health-care reconciliation bill with legislation that would make the government the “single payer” in the market for student loans. From subsidies to a “public option” to an outright government takeover, the history of American college-loan policy offers an instructive illustration of how the government can absorb an activity incrementally, claiming to cherish the benefits the private sector provides — until it becomes inconvenient. At that point, the private sector is cast as the enemy of sound reform. If the Democrats’ plan succeeds, then their health-care reconciliation bill will include a foreshadowing of its final act. And we can look to the case of student loans for a preview.
Democrats argue that the government should not be paying private lenders large subsidies to make low fixed-rate loans to college students when it could simply turn this activity over to the Department of Education, save itself billions of dollars, and redirect that money into other education projects. “The banking industry has had a free ride from taxpayers for too long,” declared Education Secretary Arne Duncan. But the bankers did not pull these subsidies out of thin air. The government provided them in exchange for a service: lending money to students at low fixed rates, so that more may attend college. It is similar, though not identical, to the way the Democrats’ health-care bill would succor the insurance industry by subsidizing its product while forcing people to buy it.
In the early 1990s, a change in federal accounting rules allowed the government to budget less money for student loans if it lent directly rather than subsidizing interest rates and guaranteeing against default. But that was purely an accounting maneuver: The actual cost of the program did not change. That didn’t stop the Democrats from attempting the same thing in student loans they are attempting now with health care — a federal takeover on the grounds that it could “save” the government billions. They successfully created a “public option” for student loans, but Republicans took over Congress in 1994 before Democrats could make it the sole option. Democrats fought and were able to preserve the public option on the grounds that “students and schools are served by healthy competition in student loan programs, which has created marketplace incentives for both programs to improve.” This is the same rhetoric they used when they tried to sell us a public option for health care.
But thanks to student loans, we can see into the future — and we see how quickly Democrats dispense with the rhetoric of competition when they are itching to add an activity to government’s portfolio. Suddenly, competition offers no benefits worth speaking of — unless you’re one of the many student financial-aid officers who prefer the customer service that private lenders provide over the federal government’s DMV-style bottlenecks, which promise only to get worse.
When it comes to student loans, liberals may ask why conservatives would support subsidies and guarantees for banks. The answer is: We don’t. By increasing demand for higher education without increasing the supply, the subsidies have driven tuition skyward. And by muting incentives for banks to lend intelligently, government loan guarantees have encouraged many students, including many for whom college might not be a good fit, to take on massive amounts of debt that they can neither repay nor retire through bankruptcy. The solution to this problem is to scale back subsidies for traditional forms of higher education while encouraging low-cost alternatives. Instead, the Democrats’ education bill would massively increase the subsidies while hiding their true cost. If that is the alternative, we prefer the status quo.
The Senate can only pass one reconciliation bill per year, which is why the Democrats — who seem to intuit that they won’t be so numerous next year — are laying the groundwork for a health-plus-education 51-vote omnibus reconciliation package. But in a way, the combination of student loans and health care is very clarifying. On health care, we see the government annexation in its middle stages. On student loans, we see the endpoint of the process: a takeover cloaked in a budget gimmick, private-sector providers vilified as free-riding looters, and a very short memory when it comes to the benefits of competition. The Democrats’ current health-care legislation isn’t the end game, and in their more candid moments, Democrats such as Barney Frank have been open about the fact that maneuvers such as the public option are just an effort to move the ball down the field toward the goal of a total federal takeover. If you want a look at their playbook, look at how they’ve handled student loans.