If you’ve had to deal with the student-loan system recently, you know how bizarre it is.
The situation is pretty straightforward. When Clinton was elected in ’92, the student-loan system was burdened by a layer of unnecessary bureaucracy. Higher-ed students would get a loan from a private lender, but the federal government would set the interest rate and guarantee the loan in the event of default. Clinton wanted to streamline the process and make it cost less — the government would make the loan, cut out the middleman, and save billions.
Conservatives and loan industry went nuts, forcing Clinton to backtrack. The eventual compromise led to two types of student loans — direct loans and guaranteed loans. Colleges were allowed to choose the system they preferred.
They went with direct loans to save money, right? Initially, yes, but after a few years, colleges started going back to guaranteed loans, even though it included more bureaucracy and seemed to cost more. Conservative activists, lawmakers, and think tanks were thrilled. Competition led people away from government and towards private entities! Hooray!
Or not. Lenders were bribing college-loan administrators.
Today, Michael Kinsley asks the question that has gone largely overlooked in political circles: why would Republicans protect a private system that the government can manage at half the cost? Why would the GOP adopt the student-load industry “in its infancy, like a stray cat, and have nurtured it ever since”?
[W]hy do Republicans love student loans? Oh, in part the usual reasons: lobbyists and campaign contributions. There is almost sure to be at least one of these firms in your district — the local bank, if no one else. But there is more. Student loans are the clearest example of the common Republican confusion between free-market capitalism and business. Capitalism is an economic system that is held, with some justification, to be the best guarantor of prosperity. Business can be capitalism in action, or it can be something entirely different. There is very little about the student loan program that has anything to do with free-market capitalism. Yet whenever the student loan system comes under criticism, lobbyists, “industry” leaders and supportive politicians haul out the same old cliches as if they were defending Adam Smith’s famous pin factory itself.
During the recent reform bill debate in the House, for example, a Republican from Texas, Jeb Hensarling, declared that the very notion of reducing the subsidy to private companies was “all part of a Democratic tax-and-spend program.”
A so-called analysis by an industry expert, which (according to the Washington Post) circulated on Capital Hill during the debate, worried that the big boys would survive but the subsidy reductions “may leave smaller lenders unprofitable.” Concern for “small lenders” was a common theme, as if a loan from a ma-and-pa bank, if such an institution exists, would be warmer and more cuddly than a loan from Citibank. Another common theme was that the subsidy cut was part of a covert Democratic effort to drive people into the direct federal loan program — or, as one lender chief executive described it, the “one-size-fits-all direct-loan program.”
This would be no bad thing, but it doesn’t seem to have been the case. I’m not sure what “one size fits all” means here, but if it refers to the interest rate that students and their families have to pay, it’s true that there is only one rate in the government program, compared with many in the private one — all of them higher. But maybe there are people for whom the variety is worth it.
I’d just add that Bush was planning to veto the recently-passed reform bill, but backpedaled. Once in a while, political circumstances really matter, and a Democratic Congress can make policy progress despite White House opposition.