Direct federal lending

NAS has a Peter Wood piece today on the possibility that student loan reform will be put into the health care bill-like-project currently languishing in Congress.  Here’s the skinny on the procedural move:

The White House and Democratic leaders are considering wrapping a student loan reform bill into the reconciliation “fix it” bill the Senate plans to pass for health care reform. At least nine senators, however, now oppose the plan, complicating Democrats’ plans to finish health care reform as quickly as possible.

I don’t know how worried one should be about this on a procedural level — it seems to me that they are having a hard enough time with health care logistics that they probably won’t want to make it more difficult.  If the House passes the Senate bill, I seriously, seriously doubt that the President will wait for reconciliation to sign it into law — promises and exhortations to the contrary notwithstanding.  The real interesting story is on the substantive grounds of the proposal — direct nationalization of federal student loan programs.  In other words, the government becomes the lender, not just the guarantor.

Wood’s analysis seems accurate (I haven’t been following this nearly as closely as I probably should).  And I think that he is probably justified in the worry that closes his piece:

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.

I don’t think that this is an idle worry — direct lending will probably make it a little easier to exert control over higher education.  But at the same time, if that’s really what the federal government wanted to do, they could probably do it now.  Wood’s worry is (I presume) that the federal government could deny loan eligibility to students of schools that don’t toe the line.  But the feds can do that right now with federally guaranteed loans.   If someone wants to go to an “ineligible” school, they can still take out a higher interest, non-guaranteed loan.  And I can’t imagine that this would change under the new legislation.

So the question is whether directly holding the purse strings will make the possibility of direct control more present in the mind of the legislature and the educational bureaucracy.  That’s probably likely.  It’s always easier to play with the toys that are in plain view.

(H/T Instapundit)


  1. Inigo Montoya says:

    I never understood why taxpayers should pay banks to act as lenders to students. It always struck me as a ripoff.

    First, there was never anything stopping banks from lending money to students before — they just didn’t want to do it without the subsidies. Turns out that those loans were very profitable, since the bankruptcy reform barred students from ever defaulting on them. Why should taxpayers subsidize bank profits?

    Second, why have taxpayers act as guarantors of any bad loans made by private actors — isn’t that what got us into this financial crisis to begin with?

    Shifting student loans back to the government seem like a no-brainer to me.


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