Oct 05 2009
The Obama Administration’s Plan to Erode Choice and Competition in the Student Lending Industry
We are all painfully aware of President Obama and the Democrats’ plan to inject a public option into healthcare reform legislation, which I believe would undoubtedly lead to government-run healthcare in America.
In the shadow of the healthcare debate, the Obama Administration and Democratic leadership are pursuing a blatant but lesser-known government takeover. This one would consolidate student lending authority within the federal government and completely eliminate government-backed loan origination by the private sector.
This big-government, anti-competition proposal was recently approved on a near party-line vote in the House of Representatives in the form of H.R. 3221, The Student Aid and Fiscal Responsibility Act of 2009.
Earlier this month in a Joint Session of Congress, President Obama declared his support for “choice and competition” and the free market as one of his guiding principles in healthcare reform. This contradictory and ironic statement hardly mirrors his proposal to make the federal government the only provider of student loans in the country.
If there is room for this principle in the healthcare system, why not in the student lending industry?
More than 75 percent of student loans in America are currently originated by commercial and non-profit lenders under the Federal Family Education Loan (FFEL) program. This program allows the private sector to compete for student loan customers with government-backed loans, resulting in healthy competition that drives down costs for students. The program provides value-added services to students through state and nonprofit guaranty agencies which offer default counseling, financial literacy and other vital services.
It is the principle of choice and competition that has allowed the FFEL program to serve the vast majority of the education community for over 40 years.
Under the William D. Ford Federal Direct Loan program, the Department of Education loans dollars from the Department of Treasury directly to students through institutions of higher education. Institutions of higher education currently have the opportunity to choose whether the FFEL program or the government-run Direct Loan program is most beneficial for them and for their students.
To someone who believes in choice and competition, it is not surprising that only one fourth of these institutions choose to participate in the Direct Loan program.
Not only would the President’s student loan proposal serve as a logistical and financial burden to any number of the 3,500 institutions of higher education which will be required to transition to the government-run student lending program, but it would also serve as a significant burden to the taxpayer.
The proposal would add one-half trillion dollars to the federal debt over the next five years. With federal deficits projected to be a staggering $9 trillion over the next ten years, we should have major reservations about mandating that the Department of Education borrow hundreds of billions of dollars from the Department of Treasury in order to finance such a massive, government-run lending program.
Unfortunately, it doesn’t stop there.
As the sole student loan originator in the country, the Department of Education will also be responsible for establishing and implementing regulations regarding the program, setting up a dangerous conflict of interest that could put the government’s interests over that of the students.
I have serious concerns that the federal government will not provide the level of quality or value-added services that the private sector does to students. Nor will it have the same capacity to pursue student loan defaults, which have risen this year.
In less than nine months, the federal government has managed to takeover automakers and financial institutions, and it has intervened in the economy in ways the federal government never has before.
By transitioning completely to the Direct Loan program, the federal government has, in effect, become one of the biggest banks in the country and the only source of funding for student loans—a dynamic I believe we will come to regret.
The Obama Administration and the Democrats’ proposal for government-run student lending is just another example of the federal government eroding the choice and competition that make it possible for our economy prosper.
Where will it end?