Newsweek has published a mini-debate (the “Student Loan Smackdown”) between for-profit bank representative John Dean and myself, on the subject of whether Congress should pass President Obama’s plan to redirect $87 billion in lucrative subsidies for for-profit banks to Pell grants and other worthy causes. Dean says “No!” while I say “Yes!” Newsweek went with “Yes.”
Apparently the standard tactic($) of spending tens of millions of dollars on lobbyists and campaign contributions isn’t working, because Dean is now saying that the legislation “adds $1 trillion to Treasury borrowing over 10 years.” In a time of exploding budget deficits and growing national debt that seems pretty scary. Why would Obama burden us so? The answer, of course, is that he’s not. Dean’s statement is a combination of exaggeration and wordplay.
First, the exaggeration: $1 trillion. What a coincidence, that borrowing would add up to such a nice, round, dramatic number! In reality, total federal borrowing was $79 billion last year and 25% of that was already disbursed through the federal direct lending program. Maybe, with some very aggressive assumptions involving truly rapacious pricing by colleges and universities (admittedly, not outside the realm of possibility), one could argue that the net increase in direct lending will add up to $800 billion over ten years. That’s not $1 trillion. It’s one thing if you’re making change at the counter, and you owe a customer eight cents, and you give them a dime to save time. Rounding principles that sensibly apply to a couple of pennies don’t automatically carry over to two hundred billion dollars.
Second, the wordplay. Note that he said “borrowing,” not “debt.” What’s the difference? The difference between having money and owing money, basically. When Uncle Sam borrows hundreds of billions of dollars from China to fund the annual federal operating budget deficit, that’s debt. We’re paying for current activities from future revenues. This isn’t as bad as taking your Visa card to a strip club, since most of the things the federal government spends money on plausibly increase future prosperity and thus future revenues. Nations are generally more productive when their children are well-educated, roads connect one state to another, and invading foreign armies are kept at bay. But as a rule large ongoing operating deficits are less preferable than reasonably balanced budgets, the current need for Keynesian stimulus notwithstanding.
What the Obama is proposing here, by contrast, is the federal government borrowing money to lend to students who will pay the money back, with interest. Some will default, but the feds were already on the hook for defaults under the current, subsidize-the-banks program. The United States Treasury also has an unmatched ability to borrow at low rates. This the difference between borrowing money to pay for groceries and borrowing money to lend out at a higher interest rate to someone else. That Dean would deliberately obscure this distinction in an attempt to scaremonger over student loan reforms shows just how attenuated the loan industry position has become.