Wednesday, January 27, 2010

An object lesson for health care 

Last week Ed Morrissey commented on another "public option" stalking a market: the college loan market. In order to get more students into colleges -- driving up demand and thus raising tuition above the rate of inflation -- the government wanted to encourage private lenders to give credit to teens and 20-somethings, a group that tends to be quite risky to lend to. So government decided it would share the risk with banks and other creditors by covering interest rate risk (subsidizing lower interest rates) while taking back some money if interest rates drop too low. Most of you educated in the 1970s and on know these as Stafford Loans.

The Clinton Administration had government directly enter the marketplace through direct lending -- skipping the banks. That in effect was the public option, and for about 15 years its had between a fifth and a fourth of the market. Both co-existed but, since the private market lenders were subsidized by the state, the government had both sides of the market. And along with that you had asset-backed securities backed by student loans (with great ratings, naturally -- example) to encourage even more lending. Unsurprisingly that part of the market was not spared in the credit crunch of 2008-09.

Now as the credit crunch subsides, some lenders are trying to get back in the market, some say, the Obama Administration intends in tonight's State of the Union Address to turn student loans even further into a plan to create a larger public sector.

As part of the White House�s �middle-class� aid initiatives unveiled today, President Obama proposed that students making payments under federal college loan programs would have monthly payments capped at 10% of income exceeding a �basic living allowance.�

That would lower the payment cap for qualified borrowers from the current maximum of 15% of income. The 15% maximum took effect in July under the government�s income-based repayment program, although some very-low-income borrowers are making no payments at all under that program.

As an example, the White House said, the 10% cap would mean that the maximum monthly payment for a borrower earning $30,000 a year who owes $20,000 in loans would be $115 a month, instead of $228 under the standard 10-year loan repayment plan.

The administration also proposed expanding the government�s debt-forgiveness program for student borrowers. Under current rules, all remaining federal student debt can be forgiven after 25 years. The White House wants to cut that to 20 years.

Already, borrowers who take public-service jobs can have their remaining debt canceled after 10 years. The administration would retain that cutoff for public-service workers.
Andrew Clark lists many things wrong with the legislation, including the possibility of having AFSCME getting into the student loan processing business, while Neal McCluskey shows how the bill includes billions in new dollars to colleges and university supposedly for retention and graduation of students, but with fairly easy guidelines to get the money. Ed points out that this should be instructive:
This is a perfect example of what the government will wind up doing to health care, either in the near term or somewhat down the road. [Obviously more down the road now that last week when Ed wrote this --kb] They intervene to promote a social agenda, and eventually decide that total government control is �more efficient� than the private sector. We need to stop the nationalization of student loans, but more importantly, we need to learn the right lesson of what happens when we allow the federal government to compete with the private sector. Eventually, the private sector gets eliminated, and we�re seeing that unfold in real time with student loans.

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