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Student Loan Reform And Intellectual Corruption

Jacob Levy marvels at the way conservatives have portrayed President Obama's student loan reform as a "Soviet-style takeover":

Notice that banks would be free to continue to make student loans. And they're not having their existing assets taken. All they're losing is the ability to make publicly subsidized student loans in the future. A comparison with Soviet nationalization is just nuts.

The old system consisted of guaranteed loans -- the government would pay private banks to lend money to students for tuition, and guarantee their losses if the students defaulted. The system was naturally rife with corruption -- lenders bribing college administrators to guarantee a chunk of the can't-lose business -- and shoddy customer service. President Clinton in 1993 introduced direct lending, where the government just lends money directly to students without a middleman. Direct lending made only partial headway, because the private banks were very persistent in their efforts to lobby or bribe colleges to maintain their business. Obama replaced all the guaranteed loans with direct loans, saving the government $61 billion over the next decade.

This is the reform conservatives see as a reprise of the Bolshevik revolution. The amazing thing is, they can't even come up with a halfway-convincing fright scenario for this government takeover. Lamar Alexander warns:

the government is charging 2.8 percent to borrow the money and 6.8 percent to lend it to the students, and spending the difference on the new health-care bill and other programs. In other words, the government will be overcharging 19 million students.” The overcharge is “significant,” Alexander adds, because “on a $25,000 student loan, which is an average loan, the amount the government will overcharge will average between $1,700 and $1,800.”

Of course, lenders didn't charge any less. The difference is that the government is using the $1700-$1800 to reduce the budget deficit and increase Pell Grants,whereas the banks were using the $1700-$1800 to buy nice things for their stockholders.

The other difference is that the guaranteed loans featured all the problems you'd expect when the government backstops all risk for a private lender. Levy notes:

Back in the days of the Savings and Loan crisis, and again in the days of Freddie Mac and Fannie Mae, we saw lots of commentary from the right that the problems couldn't be blamed on the free market. After all, in both cases massive moral hazard had been created by federal guarantees underwriting the debts, eliminating market discipline. Pains were taken to piously distinguish the free market from corporatism and corporate welfare (a distinction I take very seriously, I might add).

In the last two weeks, I haven't seen any Republican official or Republican-leaning intellectual make the slightest reference to the problems with a system in which private lenders make risk-free profits by lending on the back of a federal guarantee. The indictment of corporate welfare has been nowhere to be found.

The beneficiaries of corporate socialism tend to be highly effective at convincing the conservative movement that policies that benefit their bottom line dovetail with conservative ideology. One of the guaranteed lenders is based in Tennessee and contributes to Lamar Alexander. Like most members of Congress, Alexander faithfully represents home-state business interests. Which is to say, the viewpoint of the guaranteed lending industry becomes Lamar Alexander's viewpoint. And Alexander then transmits his opinions to conservatives via a stenographic interview with National Review. Thus the viewpoint of the lenders becomes the viewpoint of conservatives.