The Corner

Student Loan Debate, Post Mortem

I’m late getting to this post by Jonathan Chait on student-loan reform and the right’s “intellectual corruption,” but that is only because I am an irregular reader of TNR. And Chait, evidently, is an irregular reader of National Review Online. If he had been interested in discovering our viewpoint on the bill, he might have consulted our editorial on the subject, in which we explicitly addressed his argument (a variation on that hardy perennial, “conservatives are corporate shills”):

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.

These days, preferring the status quo to Obama’s grand schemes can get you labeled a lover of corporate welfare, but guess what, liberals: With regard to student loans, you created the status quo! What you call “corporate socialism” (liberal fascism?) was originally your idea. (It almost always is.) Shouldn’t you be glad that we’re finally coming around to your side, even though you’ve moved on to bigger and . . . well, to bigger things?

In addition to misrepresenting our take on the bill (by presenting Sen. Lamar Alexander’s as ours), Chait gets his facts wrong. He quotes Alexander’s line that “the government is charging 2.8 percent to borrow the money and 6.8 percent to lend it to the students, and spending the difference on the new health-care bill and other programs.” He then writes:

Of course, lenders didn’t charge any less. The difference is that the government is using the $1700-$1800 to reduce the budget deficit and increase Pell Grants,whereas the banks were using the $1700-$1800 to buy nice things for their stockholders.

Not true. I explained this in another piece Chait must have missed:

Stafford loans are provided to students at a low fixed rate set by law. Fluctuations in commercial interest rates can expose banks to losses on these loans if their borrowing costs rise too high. So to smooth out their returns, the government pays the banks a subsidy when interest rates rise. Conversely, when rates fall below the Stafford rate, lenders must remit the difference to the government. Lenders are also guaranteed a percentage to cover administrative costs.

The inefficiencies in the Stafford program existed because these “administrative costs” were negotiated via lobbyist, not because the banks were enjoying T-bill borrowing costs and pocketing the difference.

I further explained that:

… 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.

Under these projections, “Treasury can charge 6.8 percent, borrow at 2 percent, and pocket the difference all day,” says Jason Delisle, director of the Federal Education Budget Project at the New America Foundation. Sounds good, but, as Delisle points out, this scenario hides the additional risk to the taxpayer that comes with putting all those loans on the government’s books. For government accounting purposes, that risk doesn’t exist, nor does the risk that Treasury’s borrowing costs might spike.

My reason for preferring the status quo had mostly to do with this phony accounting: The Democrats’ new spending on health care and Pell Grants will materialize, even if the “savings” intended to pay for it do not. But I never defended the status quo on its own terms as, for instance, something we should prefer to scaling back subsidies for traditional forms of higher ed.

Of course, arguing that college loans should not be subsidized by the government is considered pretty radical these days. Another point I made during the student-loan debate is that it has demonstrated the process by which a basically conservative citizenry can be made to accept a much larger federal government. Step one, subsidize an activity through the private sector, gradually getting the public to think of the subsidy as an entitlement. Step two, get the government more involved through the direct provision of the activity. Step three, denounce the old subsidy as corporate welfare en route to arguing that the government should be the sole provider. If anyone counters that the government should stop subsidizing the activity, call him a radical (and possibly racist) throwback. If anyone tries to defend the status quo, call him a corporate shill.

Chait’s post nicely illustrates my point.


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