Health Care’s Test Drive: Student Aid
By INVESTOR’S BUSINESS DAILY | Posted Tuesday, April 28, 2009 4:20 PM PT
President Obama says pushing private lenders out of the student-aid program would eliminate middlemen and save money. It’s a seductive argument. Expect to hear it on health care as well.
The president has a deal for you, the taxpayer: Take the current public-private student loan program and turn over the whole thing to the government. The result? Instant savings.
Gone would be the subsidies that, we’re told, now go straight into the pockets of private-sector lenders rather than to deserving students. The administration says it could save at least $48 billion over the next 10 years in this way.
As the president explained things last week, “We’re giving lenders billions of dollars in wasteful subsidies that could be used to make college affordable for all Americans.” It sounds so obvious that we have to wonder why anyone would have set up such a stupid system in the first place.
The answer is that the system is not nearly as stupid or wasteful as Obama makes it sound. And the lenders are not parasites. If the public can’t get this, then it is setting itself up for more radical change, starting with health care.
College is expensive and student loans are a burden for many reasons. But the most important, the inefficiencies of the colleges themselves, are not on the Obama radar screen.
That’s no surprise: Academia is a core constituency of the Democratic Party, so there will be no serious reform of that sector by a Democratic administration. Compared to the professoriate, bankers are easy targets. Taking away their subsidies will score political points for the Democrats. But the promised savings are much more doubtful.
The subsidies now cost taxpayers more than $5 billion a year, and the administration claims it can save most of that simply by cutting out the private lenders. In the process, though, it would take on a significant load of new debt.
Nonfederal lenders, including banks, nonprofits and state governments, account for about 80% of federally-sponsored student loans. The rest are direct loans from the feds. Obama’s plan would shift that 80%, roughly $60 billion a year, into direct lending.
The millions of new borrowers taken under the federal wing would create new ongoing costs as well as a new liability. The mere overhead of loan servicing would be significant; the administration knows it would have to contract with the private lenders to handle the customer service, collections and paperwork.
Student loans also have a relatively high default rate — running around 5% in recent years, though figures stop before the current recession. The subsidies to private lenders went to cover their loan losses. The federal government will face the same costs and will have to cover them with tax money.
But at least the lenders won’t get their old profits. That should save something, right? The answer depends on whether you believe (as did Adam Smith and countless economists since) that there’s a benefit in the division of labor.
Contrary to what Obama says, middlemen earn their keep. The government gives private lenders some profit because the lenders, through specialization, have become more efficient at their task than the government could ever be.
Then there is the benefit of choice. It’s worth something to the public that banks are competing for its business. Sooner or later, monopolies wear out their welcome.
Just about everything we’ve said here could apply to the role of the private insurers who stand in the way of a health care system funded solely by the government.
Obama would move the country toward such a single-payer model by setting up a tax-subsidized health plan to compete — on unequal terms — with the private players and eventually force them out of the health insurance business.
It would be the student loan takeover writ large, and the arguments would be similar: Private insurers’ profits are wasteful. Consumer choice is not worth the cost. Besides, the government plan will give you everything you want.
We hope to see a full debate over student loans, because the specious arguments for government monopoly need to be answered in ways that the public can understand. Otherwise, the country will soon have much more government and far less choice.
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