Don't forget the other "public option" debate

With all of the attention in politics going to government takeovers and job losses, one issue that has elements of both remains mainly in the shadows despite an activist Congress pushing it hard.  And in this case, the bill working its way quietly through Capitol Hill offices is an explicit single-payer plan that essentially nationalizes a private-sector industry.  That sounds like health care, but actually is the Democratic Party’s attempt to seize the student-loan industry — which provides a model for how ObamaCare will eventually follow the same path.  Dana Perino wonders why this has not received the kind of attention it deserves:

While Americans were becoming increasingly disenchanted with the health care reform proposals passed by Democratic majorities in the House and Senate, another government takeover proposal was in the works. — This time the Democrats want the federal government to be in charge of student loans. …

Last fall, the Democrats passed legislation to create a “public option” for student loans and the next step in its passage is in the Senate. The only think that’s holding Democrats back from passing this legislation is the tricky business of trying to get the health care bill passed in time for the president to have a grand signing ceremony before his State of the Union address.

If you thought the public option — as it was proposed for health care was bad, get a load of this: the student loan legislation does not just set up a government-run option for student lending, the bill makes the government the only option! It promises to bring complete federalization of the student loan process to a private marketplace. Iowa Democrat Sen. Tom Harkin’s plan for the bill is to jam this single-payer student loan system through an unpopular process known as “reconciliation,” all the while ignoring any of the bipartisan alternatives that have been presented. — A truly odd decision coming off a contentious health care fight that’s left the majority of Americans with a bad taste in their mouths.

As with the shadowy and confusing language of the health care debate, you have to get past the rhetoric that sounds perfectly reasonable to figure out what is really going on. Their words reflect a desire to keep choice and competition in the student loan market. During his September health care address to Congress the president said: “My guiding principle is and always has been that consumers do better when there is choice and competition. That’s how the market works.” In a cable news interview last year, Harkin said: “The one thing, I think, the people understand that we have to have is, we have to have choice and competition.”

On that we may all be able to agree — but that’s not at all how their student loan bill works. It would not only eliminate all choice and competition in the student lending market, but it also would risk tens of thousands of private sector job losses — the last thing we need with double-digit unemployment.

Actually, we have had a “public option” in student loans for decades.  The student loan industry got its real start over 40 years ago, when Congress — in the midst of its Great Society expansion of federal government and jurisdiction — created incentives for lenders to offer large, unsecured loans to a traditionally high-risk set of borrowers: teen-agers.  Congress wanted to push more American students into college, and so they offered guarantees to lenders that allowed them to eliminate most of the risk in lending to college students, keeping interest rates relatively low.  This had the desired effect of greatly expanding this part of the lending industry, and a flood of new demand hit higher education.

This had unintended consequences, as all artificial interventions do.  First, the new demand forced prices of education to rise far beyond the cost of inflation.  This is quite similar to the effect Congressional action had on home values in the 1998-2007 period, when guarantees on subprime loans created a large flood of artificial demand.   This meant that lenders had to offer ever-increasing amounts of money to students for four-year education plans, which left them further in debt, and therefore forced students into narrow ranges of career choices in order to pay off their debt.  Defaults have always been a problem in the student loan program, which taxpayers end up eating thanks to the federal guarantees, but the cost and size of defaults rose.

Still, the government wasn’t satisfied with the breadth of loans offered or the candidate selection.  In 1993, Congress created the Direct Loan Program, one of the first bills signed by Bill Clinton as President, which skipped private lenders and guarantees in order to directly loan money to students.  The US spent billions of dollars on long-term loans, crowding out their former private-lender partners (at least at first), in order to make more politically palatable decisions on lending rather than using normal private-sector lending practices.  However, inefficiency and waste in the DL program resulted in cutbacks in its funding over the past 17 years, with 2008’s DLP budget being just over $500 million.

Democrats couldn’t sit still while their “public option” on student loans got outperformed by the market — which relied on the government guarantees designed to create the industry in the first place.  Now Democrats want to undermine the market they mainly created by ending guarantees for student loans, which would force almost all students into the Direct Loan Program.  Perino points out that this would destroy the private student-loan industry, which will not issue unsecured loans worth the value of some mortgages to students with no assets and no credit at all, especially not in this economy.

That industry employs about 35,000 people.  Some of those jobs would survive to work federal contracts in administering the DLP, although that’s no guarantee; the SEIU would like to get its hands on that work, certainly, as direct federal-government employees.  Most of those would disappear in either scenario, and in today’s credit market, they won’t get absorbed into other areas of the lending industry.

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.  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.