Update: Government Takeover of Student Lending Complete

In Education, House, Obama, Senate on September 18, 2009 at 3:03 pm

Yesterday I announced passage in the House of a bill that would cut private lenders out of the student loan industry. Today, the Senate has passed the bill and the president will soon sign it into law.

From the Heritage Foundation:

The Congressional Budget Office (CBO) has projected that eliminating FFEL would lead to significant cost savings for the government, enough to more than offset increases in the costs of the Direct Loan program and the other spending increases included in the bill.[2] However, there are questions about whether the CBO’s projected cost savings will fully materialize if these reforms are enacted.

In July, CBO Director Douglas W. Elmendorf acknowledged that the original CBO projection did not adjust for the cost of market risk of increasing defaults that the federal government will assume with the shift to direct lending.[3] In addition, there is a danger that taxpayers’ costs could balloon if the federal government proves less efficient in administering and collecting loans than current private-sector lenders, which have an incentive to administer and collect loans efficiently in order to maximize profits. (emphasis mine)

The details from yesterday’s post:

While we’re all distracted by Jimmy Carter’s accusations of racism, the Obama administration and a Democrat controlled Congress continue to saw yet more legs off the table of our free market economy.

Add to the takeover of banks and the auto industry the expulsion of private lenders from the student loan market. From WSJ:

WASHINGTON — The House of Representatives approved legislation Thursday that would effectively end private-lender involvement in the student-loan market, establishing the federal government as the sole provider of college loans.

Under the legislation, all lenders would be cut out of the market for originating loans. There would still be a role for private banks and lenders to bid for a limited number of contracts to service the loans after they are made by the government.

For companies like SLM Corp., better known as Sallie Mae, the proposed changes are already having an impact. This week, Fitch Ratings downgraded Sallie Mae to triple-B-plus status and called its outlook negative.

Sallie Mae’s shares were recently trading down more than 2% at $9.

Rep. George Miller (D., Calif.), claims that this move will cut out the middle man and funnel college funding “directly to dorm rooms.” And yet:

Having lined up additional contractors to handle the anticipated increase in direct-loan volume, federal officials say they are prepared.

Does anyone think that the government can contract out loan services in such a manner that the process is more efficient than private industry can? I didn’t think so.

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