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Obama-Care Meets Obama-Ed

March 10, 2010 By Peter Wood

Of President Obama’s three big takeovers—cap ‘n trade, health care, and higher ed—higher ed has garnered the least public attention. That may change now that the administration is attempting to impose its wishes by legislative trickery.

The health care bill that the Democrats hope to pass by “reconciliation” to avoid the normal Senatorial voting procedure is now being amended to include the administration’s Big Grab on federal student loans.  If this works, we will have one bill in which the federal government not only takes primary control of American health care but also simultaneously takes practical control of American higher education. 

Some background: last September, The Wall Street Journal (“The Quietest Trillion”) gave an early heads-up to the administration’s then-plan to move the Department of Education from a 20 percent to an 80 percent share of the student loan market.  A bill passed the House that month that would have eliminated private lenders from the federally guaranteed student loan market by July 1, 2010.  It came with a promise that taxpayers would save some $87 billion from substituting a government-run service for the rough-and-tumble of private lenders.  In October, Secretary of Education Arne Duncan sent a letter to colleges and universities across the country advising them to get their institutions ready for a 2010 implementation of the new rules, dubbed “Direct Lending.”  College officials, some House Democrats, and a few Republicans expressed their uneasiness at the new plan.

Duncan didn’t yield an inch.  Here he is in a February op-ed in the Washington Post arguing his case that “direct student loans” will save taxpayers billions and make life easier for “educators, engineers and computer scientists—the backbone of the new economy.” 

Not everyone is convinced.  A few days ago, another Secretary of Education—Lamar Alexander—inveighed in WaPo on what the folks at Department of Education “haven’t told us.”  Senator Alexander notes that DOE plans to borrow from the Fed at a 2.8 percent interest rate, lend to students at 6.8, and splurge with the difference with a massive new spending program.  He reports that the Congressional Budget Office has lowered the estimated savings from kicking out the private lenders from $87 billion to something like $47 billion.  Some 2,000 private lenders will be forced out of this business.  Services to students driven by industry competition will be eliminated in favor of typical federal bureaucratic “efficiency.”  And those “educators, engineers and computer scientists—the backbone of the new economy”?  They will be spending years longer and paying lots more to pay back loans that are actually being used to fund Congressmen’s favorite edu-pork programs. 

The effort to shoehorn the direct lending program into the health care reconciliation bill seems odd on its face.  CBS News suggests that the maneuver is prompted partly by Democrats trying to get on top of the wave of student protest over college costs that surfaced during the March 4 campus demonstrations.  But CBS also thinks that the Democrats are just grabbing an opportunity that might not come again.  “Reconciliation,” if it works, is a way of short-circuiting all the inconvenience of having to line up sixty votes for a controversial measure.  Why not slide as much unpopular legislation as possible into one giant, unpopular, economy-ruining, budget-busting, anti-democratic bill?

Student loan “reform” slipped into the national agenda rather quietly in January 2007 when New York Attorney General Andrew Cuomo began to investigate reports that Sallie Mae, the nation’s largest lender to students, had been engaged in some questionable practices.  As it turned out, many private lenders had bribed college officials, and numerous colleges had abused their students by channeling them into disadvantageous loans.  The scandal snowballed.  It grew worse as then Secretary of Education Margaret Spellings appeared to stonewall inquiries and cover for the Republican-friendly Nelnet Corporation, a student loan re-financer that had gamed a DOE program to extract hundreds of millions of unwarranted payments.  The mischief culminated in an ill-considered law signed by president Bush in September 2007, the College Cost Reduction and Access Act, CCRAA, that cut the payments to private lenders in the federally guaranteed student lending business so drastically that many of the lenders—some sixty of them—simply quit.

That added more snow to the snowball by creating the prospect that students would have a much harder time finding loans the following year.  Congress recognized its mistake and in May 2008 rushed through a bill that authorized the Department of Education to buy up “debt” from the private lenders.  In many ways this was a rehearsal for the great economic collapse and bank bailouts that came later in 2008. 

In a certain sense, the private lenders who participated in the federally guaranteed student loan programs brought the house down on their own heads.  Corrupt practices combined with wildly imprudent financial dealings opened the way for the “reform” that President Obama, Secretary Duncan, and the Congressional leadership now intend to push through. 

I don’t have much sympathy with those lenders, though surely only a minority was corrupt and imprudent.  The real question is whether concentrating federal student loans in the U.S. Department of Education is really going to be an improvement.  If the legislation passes, we may well be trading a flawed system for a disastrous one.  With direct federal control of student loans will come, as surely as a hangover follows a binge, federal control over the content of higher education.