September 29, 2009, 09:00 AM ET

Desperate Arguments Against Student-Loan Reform

Newsweek has published a mini-debate (the "Student Loan Smackdown") between for-profit bank representative John Dean and myself, on the subject of whether Congress should pass President Obama's plan to redirect $8-billion in lucrative subsidies for for-profit banks to Pell Grants and other worthy causes. Dean says "No!" while I say "Yes!" Newsweek went with "Yes."

Apparently the standard tactic($) of spending tens of millions of dollars on lobbyists and campaign contributions isn't working, because Dean is now saying that the legislation "adds $1-trillion to Treasury borrowing over 10 years." In a time of exploding budget deficits and growing national debt, that seems pretty scary. Why would Obama burden us so? The answer, of course, is that he's not. Dean's statement is a combination of exaggeration and wordplay.

First, the exaggeration: $1-trillion. What a coincidence, that borrowing would add up to such a nice, round, dramatic number! In reality, total federal borrowing was $79-billion last year and 25 percent of that was already disbursed through the federal direct-lending program. Maybe, with some very aggressive assumptions involving truly rapacious pricing by colleges and universities (admittedly, not outside the realm of possibility), one could argue that the net increase in direct lending will add up to $800-billion over ten years. That's not $1-trillion. It's one thing if you're making change at the counter, and you owe a customer eight cents, and you give them a dime to save time. Rounding principles that sensibly apply to a couple of pennies don't automatically carry over to two hundred billion dollars.

Second, the wordplay. Note that he said "borrowing," not "debt." What's the difference? The difference between having money and owing money, basically. When Uncle Sam borrows hundreds of billions of dollars from China to fund the annual federal operating budget deficit, that's debt. We're paying for current activities from future revenue. This isn't as bad as taking your Visa card to a strip club, since most of the things the federal government spends money on plausibly increase future prosperity and thus future revenue. Nations are generally more productive when their children are well-educated, roads connect one state to another, and invading foreign armies are kept at bay. But as a rule, large ongoing operating deficits are less preferable than reasonably balanced budgets, the current need for Keynesian stimulus notwithstanding.

What the Obama administration is proposing here, by contrast, is the federal government's borrowing money to lend to students who will pay the money back, with interest. Some will default, but the feds were already on the hook for defaults under the current, subsidize-the-banks program. The United States Treasury also has an unmatched ability to borrow at low rates. This is the difference between borrowing money to pay for groceries and borrowing money to lend out at a higher interest rate to someone else. That Dean would deliberately obscure this distinction in an attempt to scaremonger over student-loan reforms shows just how attenuated the loan industry-position has become.

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Comments

1. atana09 - September 30, 2009 at 09:38 am

Well its not like the subsidized corporate lenders have a ethical grip when it comes to numbers. It would be very interesting to see exactly how many millions, billions, or trillions have been lost to the various blatant, hidden, overbillings and other manipulations by these corporations. The 9.5 scandal and Nelnets one 270m overbilling alone add up to something more than pocket change. And those are just two incidents.

And studies about how much is lost to the general economy and attendent government revenues because of a system which turns many of each new generation into educated sharecroppers; would demonstrate the real social and economic losses inherent to our current system.

It is not surprising that their usual tactics are no longer working was well as they once did. A generation of selectively buying a few selected congressmen or braying that if they are cut academe will collapse did work and is about to end. Largely because these companies have exposed the middle class to its very own form of predatory lending. And now the economies on the brink, that middle class has become so scared and so alienated that congress has finally begun to hear. Not well, but enough to know that education+predatory lending is something the middle classes are very concerned about, and may become vehemently outspoken over as the economy worsens.

The biggest dilemma in the whole mix, is that although many in the middle classes are little more than lifelong tribute payers to the educational lenders the full effects of this system are not comprehended. Beyond their individual cases (or tragedies) they do not fully comprehend how economically dangerous the student lending system has become. If such as Chronicle's and others exposes and essays and the work of such as Dr. Warren where more widely distributed it is very probable there would be a mass public call for very serious reform.

Direct lending is not a panacea, especially so if consumer protections are not restored in regards to student lending. But at least it is a small start towards reforming the dominant corporate system which has turned American higher ed into a social detriment rather than the road to the city on the hill. Or at least the path to the middle class.

2. cbr79 - September 30, 2009 at 10:15 am

If I had to rate Mr. Dean's statement about adding $1 trillion to the national debt on accuracy, I would give him a B. He's correct that the Obama proposal would add about $800 billion to the national debt. Include what direct lending is already expected to add ($200 b), you're up to $1 trillion.

That's hardly a sign of desperation.

The real doozie in the Newsweek piece was Carey's statement that "The federal government will spend $87 billion over the next 10 years subsidizing banks to give student loans. All this does is give that money back to students in the form of larger Pell grants."

If Carey is concerned about desperation, he has met the enemy and it is he.

There's very little that is true about those statements. The government is not going to be paying banks $87 billion to make federal loans. That intellectually dishonest claim is meant to stir up anger towards lenders.

That's not where the $87 billion in savings comes from. It comes from the government making a huge profit off of borrowers--lending Treasury funds, which the government borrows at about 2%, to families at up to 7.8%. As Carey said, "The United States Treasury also has an unmatched ability to borrow at low rates."

Finally, only a fraction of the savings, which CBO by the way has already said won't materialize, goes to Pell Grants, not all of it.

3. mkant69 - September 30, 2009 at 12:53 pm

The claim that 100% Direct Lending will add $1 trillion to the national debt over 10 years is not new and is not inaccurate.

The Presidential Budget Baseline spreadsheets for FY2010 provide net commitment projections for 2010-11 through 2016-17 (seven years). The last year of the projections represent a 6.0% increase in Direct Loan origination volume and a 5.9% increase in FFELP origination volume, and it seems reasonable to use a similar rate of increase to project the final three years of loan volume. This yields ten-year FFELP projections of $914 billion and ten-year Direct Loan projections of $309 billion, yielding an overall total of $1.223 trillion in Stafford and PLUS originations. It does not include the $60 to $70 billion of Perkins loan originations, which would bring the total increase in Direct Loan volume stemming from the SAFRA legislation to $974 billion to $984 billion, pretty close to $1 trillion. Given the recent 25% spike in borrowing, it seems reasonable to round the figure rather than give a false sense of precision. If anything, the $1 trillion figure is probably a slight underestimate. On the other hand, this figure doesn't consider the roughly $108 billion in payments to principal during the ten-year period as an offset to the total.

That being said, the increase in Treasury borrowing is not a pure spend. In exchange for this increase in the national debt, the federal government will hold title to assets that are worth at least as much as the debt, namely the student loans. These student loans will also generate more than $760 billion in interest income to the federal government over the life of the loans, assuming an average repayment term of 20 years.

Mark Kantrowitz
Publisher of FinAid.org and FastWeb.com

4. jonart - October 13, 2009 at 12:57 am

Sometimes my party is just dumb. In opposing the Obama plan, the GOP pushes the argument of government nationalization and choice, which appeal to our base but not middle class, swing voters. You know, the folks who actually determine who wins an election. The irony is that there are two excellent arguments to appeal to those middle class, independents. One: the Obama administration has never disputed that full throated direct lending is going to cost JOBS, middle class jobs. Two: the "savings" associated with direct lending comes from high interest rates on student loans _paid_ by middle class families. The Obama folks want to give that middle class money to the poor in the form of Pell Grants. They're pushing a policy that they know are going to reduce middle class JOBS in places like Pennsylvania and they're pushing a policy they know is going to REDISTRIBUTE MIDDLE CLASS MONEY TO THE POOR. This is what happens when you put liberals in charge.