Student loan industry’s subsidy distorts market 

Every company and every industry currently reaching out for subsidies, mandates and protective regulation should study the student loan industry’s predicament — being chased to the gallows by the Democratic majority — and ask whether political plunder is really the path to profit they want to follow.

The financial institutions who have pocketed subsidized profits in student loans for decades are now sounding the free-market siren, warning of a “government takeover.” But it’s hard to work up sympathy for an industry built on subsidy suckling.

Democrats may load up the looming filibuster-proof budget reconciliation bill — also a potential vehicle for health care reform — with the Student Aid and Fiscal Responsibility Act. SAFRA would end federal subsidies for student loans, replacing them with direct loans from the government.

In other words, SAFRA could be a death sentence for the student loan industry. It’s no surprise that student loan giants — led by Sallie Mae and bailed-out Wall Street titans Citigroup and Bank of America — have lobbied up and launched a dire public relations campaign to battle the nationalization of their industry.

The lenders are right that SAFRA has plenty of problems. First, the second half of the bill’s title is a sham. The supposed “fiscal responsibility” of the bill comes from the promise of saving $87 billion over a decade and spending $1 billion per year on deficit reduction.

The savings are not imaginary — government essentially would take most of the profits that private lenders currently enjoy — but they are inflated.

The $87 billion figure assumes zero defaults. The number drops closer to $40 billion when the risk of default is included, according to the Congressional Budget Office. Because the bill authorizes $77 billion in new spending, it would probably add to the deficit.

Student lenders, in an appeal to conservative worries about growing federal power, argue direct federal aid to colleges will lead to more federal control of academia. This is a well-founded fear.

It’s easy to imagine the Education Department telling an orthodox Catholic college, “Want your federal loans? Better start providing the pill to your students.”

And, of course, giving loan processing and debt collection to federal bureaucrats is not a recipe for efficiency or good customer service.

It’s not surprising that lenders have found defenders in the Republican Party. The House Education Committee’s top Republican, John Kline of Minnesota, said last year, “First, we saw a drive toward complete government takeover of our nation’s health care system. Now, we see government seizing control of student lending, forcing out the private sector.”

But calling the student loan industry part of “the private sector” is a bit of a stretch. These financiers are swimming in federal subsidies.

First, while their customers are in college and for six months afterward, taxpayers pay the interest on many of the loans (subsidized Staffords). Also, student loan interest is tax deductible.

If student borrowers default, banks don’t take it on the chin — taxpayers do. In 2008, the government started buying the loans off banks above market prices. In the past, subsidies were even more generous.

Why should taxpayers bear the risk while student lenders reap the profits?

SAFRA is not the right answer; a truly free and unsubsidized market in tuition and student loans is. Subsidizing loans, with or without a profit-taking middleman, transfers wealth from taxpayers to colleges, driving up tuition and favoring college over other legitimate undertakings a 19-year-old might consider, like starting a business or learning a trade.

But this nationalization should serve as a cautionary tale for others — such as health insurers and the tourism industry — looking to latch onto Leviathan’s teat.

For a business, getting in bed with Uncle Sam is like marrying Henry VIII — you may reap benefits you never could have gotten on your own, but history suggests the affair won’t end well for you.

Timothy P. Carney is The Washington Examiner’s lobbying editor.

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