The Wall Street Journal has a head-scratching editorial today that tries to connect having the government make all federal student loans with the ongoing health care debate. A greatest hits of convoluted and poorly presented conservative talking points, this editorial makes last week’s Forbes piece look subtle, nuanced, and rational.
Here’s a close look at what the editorial misses, distorts, and just gets plain wrong about the debate between the 100 percent government Direct Loan Program and the Federal Family Education Loan (FFEL) Program, where the government guarantees the vast majority of a loan.
While government accounts for 41% of health-care spending, the feds guarantee or issue roughly 80% of student loans, subsidizing the rates and also offering a slew of grant programs.
Catch the false comparison there? Health care and student loan spending are not the same thing. One is the total amount of money spent in an entire field; the other is the amount spent in a subset. Just looking at the student loans figure ignores all the money people spend out-of-pocket on tuition or grant aid provided by states, schools, or even the private lenders that the Journal defends.
Not by coincidence, higher education costs have risen much faster even than in the health-care market. From 1982 through 2007, college tuition and fees increased 439% in nominal dollars, almost triple the rise in median family income, according to the National Center for Public Policy and Higher Education.
College costs have undoubtedly been a huge problem. A student could borrow up to $2,500 in Stafford loans in 1982. Until the spring of 2008 a freshmen could borrow up to $3,500, while a senior could take out $5,500. That’s a growth of 40 percent and 120 percent, respectively, over a 26 year period. Subsequent legislation added another $2,000 to those limits, which brings the total increase to 120 percent for freshmen and 200 percent for seniors. Maybe these loan limit changes contributed to tuition growth, but they certainly can’t be the only factor.
In terms of Pell Grants, the maximum award was $2,100 in 1982. This coming school year it will be $5,350. That’s a growth of 155 percent, though the vast majority of that increase has come in the last few years.
Simply put, we are watching in student loans exactly what ObamaCare’s harshest critics have forecast for health care: a “public option” that ultimately destroys all competition.
This would have been a great line in 1965 when the first version of the FFEL Program became law. Ever since then, federal student loans, as the name implies, have been a government product. The government guarantees all but a small fraction of loans, pays a subsidy to lenders so they will issue them, and for more than a year, has been buying loans from private lenders so that the whole system stays afloat. The proposed changes are not about adding a public option but rather restructuring one that already exists.
The competition claim is also dubious. Right now, federal legislation lays out borrower terms for students, including the interest rate, how it will be repaid, and any upfront fees. When lenders compete, they are fighting over are small borrower benefits and vague customer service metrics that are not measured. The fundamental product, however, is the same regardless of whether you borrow from Sallie Mae or Joe’s Loan Shop.
Turned off by customer service that’s good enough for government work, students have voted overwhelmingly for the private lenders.
Last I checked, schools picked the program that decided to participate in, and the students must get a loan through whatever program their institution uses. I have yet to hear about a student that made their college choice based upon the loan program.
The volume discrepancy between the government loan program and the bank-based one is an issue frequently raised by opponents of Obama’s plan. But it’s also misleading. The U.S. Department of Education spends little to no money marketing its loans, while lenders invested million sand millions of dollars into advertising. (They also spent some money paying off schools to participate in the FFEL Program.) What happened this past year when stability concerns trumped flashy brochures? The Direct Loan Program’s volume nearly doubled ($).
[The head of the financial aid office at the University of Maryland] notes that the Department of Education doesn’t apply the same rigorous procedures as private lenders to prevent defaults.
This statement is half true. The Department of Education does not provide the same default aversion assistance that is present in the bank-based system. But the rate at which students default in the FFEL Program is actually higher than in direct lending. Just because you spend money to accomplish something does not mean it actually happens.
Along with outlawing government-backed loans issued by private lenders, the bill also strengthens the power of the “public option” versus pure market loans.
It’s debatable whether private student loans are a “pure market,” since Congress enacted a legislative provision that prevents them from being discharged in bankruptcy. That aside, the Journal is saying that students should pay more to borrow money for college that has gotten too expensive. As Student Lending Analytics notes, not only are private loans not really a good deal, but most low-income students can’t even get them anyway due to poor credit. This isn’t a matter of public option or private insurance. It’s public option or no insurance.
For another category of federal loans, Mr. Miller allows students to enjoy a variable rate if interest rates fall, and a cap in the event that they rise. … Mr. Miller has also locked in low fixed rates for the most popular types of Stafford loans—as low as 3.4% for some undergraduates.
This is a factual error. Sec. 203 of the bill eliminates these low fixed rates and replaces them with variable rates. These aren’t different subsets of loans. I’ll keep my eye out for the correction.
In another 2008 change, a Miller bill placed new paperwork requirements on private loans.
This is true. Lenders must now disclose previously hidden fees and charges to borrowers and make sure the terms and conditions of a loan are clear. It makes it harder to defraud students.
Interest-rate and default risks are not fully priced into the government’s cost estimates.
This is true for both programs and would still apply even if there was no direct lending switch.
What we have here is Congress aiding, abetting and obfuscating a government takeover of an industry. … Now President Obama is explicit about wanting the government to take the dominant role in student loans.
And the Journal closes by directly contradicting itself. As is noted seven paragraphs earlier, the federal government already makes 80 percent of the loans. That seems pretty dominant, and the plan to switch how that vast majority gets issued seems pretty overt. Almost as if it was announced in a national speech.