I’m not surprised that Paul articulated my point about the wider implication of the Miller/Obama student loan proposal even better than I could.
As Paul says, the federal government has long paid a subsidy to private loan providers in the Federal Family Education Loan (FFEL) program. That’s because banks incur costs when they originate and service loans and the federal government wants banks to give loans to everyone. The government used to acknowledge that the banking industry has some expertise in banking that federal bureaucrats do not.
No such recognition exists today. The federal subsidies on loans were the proverbial camel’s nose under the tent of the private lending industry. Then came the Direct Loan program, created when the federal government decided it could save some money by distributing funds directly to schools (even if it meant fewer options for students). And after that it was an easy step to “Why don’t we just directly finance all loans and the banks can work for us.”
Sound familiar? Paul rightly points out that the federal government has already nosed its way into the health care tent through Medicare and Medicaid. Next step: a program that acts like insurance but is run by the government. Step after that: “Why don’t we just put everyone on our insurance (and health care providers can work for us).”
The grease on that slippery slope is provided by the argument that the government saves money by originating loans rather than paying private companies to do it. But this depends on the federal government being able to access cheap capital by issuing debt through the Treasury. If the government becomes the nation’s (or the world’s) biggest bank – issuing untold amounts of debt and pushing private sector participants out of financial markets – how long will that last?
And at a more basic level, do we really want to depend on the government to pay for everything from pre-school to student loans to health care to retirement (not to mention used cars, lightbulbs, home mortgages, air conditioners, and PBS)? At want point do we become wholly owned subsidiaries of whoever’s in charge in Washington?
It’s worth noting, too, that the public has already spoken on this. For ten years, schools have had the option of choosing the Direct Loan program instead of the FFEL program. Only about 20 percent did. The inflated figures Paul cites – still only about 30 percent of all colleges – resulted from several private issuers dropping out of FFEL during the credit crisis, forcing schools to scramble into Direct Loans.
Some may believe that schools were sticking with banks because they offered better swag than the federal government did. But it could also be that banks offered better service.
