NCPA - National Center for Policy Analysis


May 6, 2008

Convinced that private lenders were making too much profit on federally insured loans, Democrats enacted changes last fall that rendered most new student loans unprofitable. As numerous firms abandoned the market amid the credit crunch and just before the peak of college financing season, the anxious politicians realized their blunder and are now seeking a bailout of the same lenders they just finished punishing, says the Wall Street Journal.

Rep. George Miller (D-Calif.) has also pushed through a plan to allow the federal government to buy an unlimited number of these loans directly from private lenders.  After a modest rewrite by the Senate last Wednesday, the House passed the bill Thursday.  It will soon be sitting on the desk of President Bush, who says he's eager to sign it.

Given how deeply the government is intervening in this market, you might ask: Why not just have the government loan money directly to students?

  • President Clinton created a direct lending program in 1993 and some on the left hoped that it would drive the private lenders completely out of the market.
  • But in 1997 the direct lending system crashed, as a large federal bureaucracy was unable to process paperwork quickly enough to serve borrowers.
  • The system's private contractor warned investors last year that it has had trouble developing the program's new software, but the direct lending program is now picking up business amid the turmoil Congress created in the private markets.

Congressman Miller is so confident that the bureaucrats can manage everything this time that he is now trying to eliminate some regular audits of the program.  This auditing refinement, which has passed the House but not yet the Senate, eliminates the requirement to report how much the program contributes to the national debt.  So, if no one is counting, asks the Journal, then no one can say it costs the taxpayers any money, right?

Source: Editorial, "An Education in Bailouts," Wall Street Journal, May 5, 2008.

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