It was nice while it lasted
Mar 24th, 2010 by David Anderson
I guess the Sallie Mae Jobs that we celebrated won’t be long term. Democrats stuck in the health care reconciliation bill the Nationalizing of the student loan industry and Delaware stands to lose. There are some benefits to going the direct route. The federal government already has a small direct program and experience administrating it. It will no longer pay to make bankers money. It will just cut out the middle man saving billions. It sounds good.
All is not roses with that scenario. It would set up a federal monopoly in the industry. The history of that has not been great. College administrators hate the idea because the federal side has horrible service. It is slow and they find it hard to correct errors. Innovations have made life simpler for everyone by having new systems to verify enrollment. The savings estimates are not accurate because they do not take into account the default burden.
Also not counted is the potential loss of freedom. This will give the federal government a lot more control of the money going to colleges and universities. I find it hard to imagine they will not want more influence to match. It may be the federal tool to get into private universities. I am skeptical of this move which is happening without serious debate in the health bill. Let’s have an honest discussion before we move on it.
UPDATE: Here is a great article covering this topic from the Wall Street Journal.
But in a remarkable letter to Senator Judd Gregg, CBO Director Douglas Elmendorf admits that government accounting is bogus. He writes that the statutory methodology “does not include the cost to the government stemming from the risk that the cash flows may be less than the amount projected (that is, that defaults could be higher than projected).” Mr. Elmendorf further notes that the government’s accounting system is specifically skewed to make direct loans from the government appear to cost much less than guaranteed loans made by private lenders. He says the real “savings” are only $47 billion, even though, in a deception that would be criminal fraud if it weren’t mandated by Congress, the official estimate remains at $80 billion.
Even the unofficial number is dubious. The government has been claiming lower default rates than private lenders, but most government loans have been to students at four-year colleges. The private lenders have serviced a higher percentage of students at community and two-year colleges, where defaults are more common regardless of lender.
If the feds are now making and owning all such loans, expect default rates to soar. When the government hires contractors to collect on its loans, it pays them for simply calling the borrower, regardless of the result. Private lenders, on the other hand, make money from a performing loan and have a greater incentive to do careful underwriting and aggressive collection.
***The government will nonetheless start spending these illusory “savings” immediately, and this spending is certain to top official estimates. The Obama plan also adds a CBO-estimated $46 billion in new spending over 10 years to enlarge Pell grants. Ominously for the federal fisc, starting in 2011 these grants will automatically rise each year by the consumer price index plus 1%. Not that students will actually benefit from this subsidy explosion. Colleges have reliably raised prices to capture every federal dollar earmaked for education financing.
Rep. John Kline (R., Minn.) decided the cost estimate for Pell grants was too low, so he asked CBO to take a second look. Along comes another enlightening letter from Mr. Elmendorf. This week he wrote that Mr. Kline is correct—it looks like they will cost another $11 billion. Unfortunately, the earlier estimate must remain the official score under budgeting rules, even though the official scorekeeper says it is wrong.
David , my fear is how this will affect faith based universities. My understanding is that the federal government already refuses to guarantee loans to faith based schools( you know the whole seperation of church and state that doesn’t exist), if so, how will this expand that practice? Will this leave students wishing to go to these schools no where to turn for loans ? And as you say , we know that any money the federal government hands out is tied to some sort of string of regulations, not a good thing for universities who have fought over the years to remain free of government intanglements.
Often in this space I have heard people advocating spending cuts that would put hundreds of thousands of poeple out of work, in the name of saving taxpayer money.
I guess you were happily envisioning Democratic bureaucrats weeping in the corridors as they carried their pink slips cardboard boxes out to their cars.
So sorry this student loan cuts affects “bankers,” not government workers, and doesn’t fit your vision of spending cuts.
This student loan move is saving the taxpayer billions which can now be applied to actual loans to actual students, instead of bank subsidies. What is wrong with that?
And banks are still free to offer loans to students. Why can’t banks come up with a product that makes sense?
It is hard to compete with an entity that is planning to lose tens of billions in the venture and offer the product well below any cost. As I said the cost projections do not take all angles into account. They will do what they can, follow the link.
Here is an interesting quote. CBO Director Douglas Elmendorf states that the “billions in savings” from converting FFEL to DL are deceptive. According to the CBO Director, current budget scoring rules do “not include the cost to the government stemming from the risk that the cash flows may be less than the amount projected” (that is, that defaults could be higher than projected). CBO found that after accounting for the cost of such risk … the proposal to replace new guaranteed loans with direct loans would lead to estimated savings of about $47 billion over the 2010-2019 period-about $33 billion less than CBO’s estimate under the standard credit reform treatment.” (Costs to the government stemming from the risk that the cash flows may be less than the amount projected.)
Due to this market risk assessment, CBO reported that it will actually cost taxpayers billions more than Democrats have acknowledged. When CBO re-examined the cost of reforms to the Pell Grant program, they found an additional $11.4 billion in spending, costs that will be passed on to taxpayers resulting in further deficit spending. Their review predicted an additional $10.5 billion in direct spending over ten years, along with $900 million in additional discretionary spending.
Spoke with Sen. Carper’s aide about this last week. He gave us some bull about the Federal Government can loan at lower interest rates but Sallie Mae is REALLY good at uncovering waste and fraud and making people pay back their loans. So I said to him, “So you are basically turning them into glorified collection agencies”. She stuttered and stammered trying to say it would save money and Sallie Mae was happy about it. Complete bull.
What do you want to bet Sen. Carper votes no on the health care reconciliation so he has cover when we lose all these jobs?
They are such scum.
You have been demanding spending cuts for like forever.
And now you have a real Democratic spending cut staring you in the face, and you don’t like it.
Go figure. I guess the only spending cuts that count are Republican spending cuts, that defund stuff Republicans are politically opposed to.
I added an update just for you. Follow the link please, in case you don’t I gave you a taste of the article.
I hope the new set up is not as bad as Comcast. I spent 7 hours of my precious American freedom trying to get them to correct my bill. Everyone I talked to at Comcast so far has been in the Philippines.
Why would anybody loan big money to an unemployed college student? That is why the government takes all the risk. Nice business for Sallie bank. They make no risk loans we taxpayers cover the risk. Not anymore. Change. Please. More change. Too big to fail is going down next.
This is one of those lead, follow, or get out the way moments in history.
Good, I wish that we would have this type of discussion on Capitol Hill if this is one of those moments. It deserves to aired out.
Faith based institutions can and do get student financial aid, but the Federal government has a couple of minor strings that some institutions opt out because of them. I like you am concerned that the strings will multiply. Right now a school of theology that does not take women could lose the right to get federal aid because of discrimination. What if ENDA passes and gays are added to list. That would eliminate 90% of Christian schools. Yes, I do share your concerns, Frank. If they do that now, people can turn elsewhere. If they take over everything and drive independent lenders out of business and there are no voices clamoring for business (the lenders oppose adding more restrictions because that cuts down their base of business), anything could happen. That is not even being discussed in all of this until now.
It used to be said follow the money. Now it is follow the power.
For the mathematically challenged, If the savings are going to be only 47 billion instead of 80 billion and the new spending in the program will be 46 billion then the real increase in the Pell grant program is 11 billion more than accounted in the original estimate, that leaves us 10 billion in the hole with this scheme.
I think increasing Pell Grants is useful so the case can be made, but it is being made under false pretenses. I am just pointing that out.
the savings are going to be only 47 billion
Fifty billion here, fifty billion there, pretty soon you are talking about real money.
The savings are real and are the result of Democratic spending cuts. The fact that they are being re-applied to new spending may rankle you, but that is a separate issue.
When all is said and done, it is a better and more efficient use of taxpayer dollars.
By the way, I loved reading “the savings are going to be only 47 billion” when conservatives are defending banks.
Did you miss that the entire program puts us $10 billion in the hole before another 29 billion is used for healthcare? This savings will cost us an extra $40 billion in new spending.
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