Big Government, Congressman Ryan, and Student Loans

Originally Published on forbes.com on March 31st,2012

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Alan Collinge has appeared here several times with posts on the student loan crisis. He just sent me a new contribution with his commentary on the Republican budget proposal as it relates to student loans. I don’t agree with his analysis, but if I had to agree with all of my guest posters all of the time, I would have to write all the posts myself and I have a day job to tend to. It is a great job. This time of year, we get free dinner Monday through Thursday, free lunch on Saturday and free coffee all the time. It does cut into my blogging time though.

One would think that behind the scenes, Republicans are hard at work developing smaller government initiatives in response to overwhelming populist demand, and in keeping with their stated beliefs.  Digging into the higher education related elements of Congressman Ryan’s budget, however, reveals something quite different.  In fact, it appears that Ryan’s intention with higher ed is to grow government, and grow it significantly. This is couched in a so called “fair value” accounting scheme applied to the federal student loan program that can only be described as a lie to the American people, and a big, fat, painful lie at that.

Here’s the situation:  a couple of years ago, President Obama overhauled the nation’s student loan program whereby the lending and guarantor functions (previously performed by the private sector) were taken over by the federal government.

So, the old, “Federal Family Education Loan Program” (FFELP) was subsumed by the federal government. Remember, now, this was lending system that allowed Sallie Mae’s stock price to rise more quickly thanMicrosoft‘s when that stock was on fire.  This was a lending system that garnered Sallie Mae CEO enough cash to make a tender offer on a major league baseball team, and even build his own, private, 18-hole golf course just outside Washington D.C.  It is also the lending system that supported an extremely rich network of guaranty agencies, who thrived on penalties and fees attached to defaulted loans.

The old, FFELP system was also extremely lucrative because of subsidies. Interest subsidies paid to the lenders while students were in school, and also when their student loans were in deferment.  There were also very lucrative spread subsidies, and other subsidies paid by the federal government to guarantors for various reasons.

Under Obama’s new, Direct loan program,  all of this money now goes to the federal government.  The Department of Education now makes every nickel of interest (and charges students even more than the FFELP loans did), makes
all the money the guarantors previously made on penalty and fee income derived from defaulted student loans (and the fed was already making $1.22 for every dollar paid out on defaulted FFELP loans).  The Fed also no longer pays any of the subsidies mentioned above.

So, to say that the federal government is losing money, not making it (and a ton of it) on the new, Direct Loan program would be beyond incredible.  It would be a lie.

Yet, this is precisely what the beltway crowd are now claiming, because Congressman Ryan is proposing a change in the Republican budget that uses a new, “fair value” accounting method- which counts money not made by thelending program if it were to charging supposedly “market rates” for it’s loans to borrowers- as a loss! According to “experts” like Jason Delisle at the New America Foundation who is defending the Republican proposal, the lending system is, indeed losing money overall, and this accounting change reflects that.

This is beyond belief and credibility, and raises obvious concerns. First, there is no way on God’s green earth that the new lending system isn’t making money, and a large amount of it.  This big, nasty government program thrives not only on interest income and elimination of subsidy payments, but also on the predatory underpinnings of the program, like the absence of bankruptcy protections, statutes of limitations, and the presence of draconian collection powers that make defaulted loans more profitable than healthy ones.  Where the lenders and guarantors were making “mad” money under the old program, the federal government is making even more under the new program.  No one looking you straight in the eye could disagree with this unless they were lying to your face.

Second, and perhaps most importantly:  Why on earth are the Republicans buddying up with big-government champions like the New America Foundation in trying to protect this obvious, shameless, beltway monstrosity?  Is this what the rank and file conservative Republicans can expect from their leadership in the House going forward?  If so, I recommend strongly that they be immediately replaced, by true conservatives not infected by the bureaucratic, beltway sickness that seems to have enveloped both parties on this issue and others.

If the Republicans, particularly the younger ones on the Hill like Paul Ryan aren’t there to battle government largess, waste, and intrusion into  the lives of decent citizens -both rich and poor- what are they good for?

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Alan Collinge is founder of StudentLoanJustice.Org , and author of The Student Loan Scam: The Most Oppressive Debt in U.S. History – and How We Can Fight Back

I have two thoughts on Alan’s analysis.  One is that to the extent Sallie Mae was profitable due to subsidies from the federal government, its profitability drops out of the equation.  You can’t argue that the federal government will be as profitable as Sallie and will come out even further ahead because there are no longer subsidies to pay.  More to the point scoring the loans as an expenditure, when you mark them to market will make it harder to make more of them, which might help with tuition inflation.  Applying the principle of accounting conservatism (which has nothing to do with political conservatism), the proposal actually seems sound.  Hopefully, Allan will weigh in and set me straight.

You can follow me on twitter @peterreillycpa.