This week the finance industry reacted with alarm to sections of the Obama budget that would push the banking industry out from the center of the student-loan business and turn billions of dollars in private profits into scholarship money, aiming to cut corruption and lower skyrocketing student debt.
The Obama plan is a version of reform plans that have been floated for years as abuses in the student-loan industry have come to light. The difference is that this one is likely to pass into law.
The finance industry has responded by deploying an army of lobbyists, who are rehashing arguments about the threat student-loan reform poses to the free-market in financial products that has come to provide essential choice to borrowers… and so on.
Here’s how the New York Times front page reported developments yesterday:
The proposal has ignited one of the most fractious policy fights this year …[T]he private loan industry, which would have collapsed without a government rescue last year, has begun lobbying aggressively to save a program that has generated giant profits with very little risk …
The nation’s largest student lender, Sallie Mae, has hired two prominent lobbyists, Tony Podesta, whose brother, John, led the Obama transition, and Jamie S. Gorelick, a former deputy attorney general in the Clinton administration.
For lenders, the stakes are huge. Just last week, Sallie Mae reported that despite losing $213 million in 2008, it paid its chief executive more than $4.6 million in cash and stock and its vice chairman more than $13.2 million in cash and stock, including the use of a company plane. The company, which did not receive money under the $700 billion financial system bailout and is not subject to pay restrictions, also disbursed cash bonuses of up to $600,000 to other executives.
The industry chiefs and their lobbyists know their time has come. Worldwide opinion of finance is in the commode, and the country is brimming with people — including the Obamas — who have first-hand dealings with the unresponsive, jumbled, exploitative and corrupt student-loan industry.
It suddenly seems clear that it doesn’t have to be this way.
The government used to give students guaranteed loans at stable, low-interest rates, partly as a public service to foster education. Then came Reagan, basically, who took advantage of 1970s rules changes to bring in private lenders because, as we all know, competition is good. Except, as is so often the case when it comes to big business, there was never any real competition. The banks got subsidies and guarantees against risk from the government while sticking it to the borrowers, selling them on expensive loans whenever they could and charging the maximum-allowed interest.
Pretty soon student-loan interest rates doubled; Sallie Mae was taking 43 percent returns without risk in the expanding $85 billion industry; university financial aid officers were being wined and dined by companies like Student Loan Xpress to promote their “products”; the personal data of borrowers was being illegally mined by the banks and their marketers; and lender lobbyists were working over time to defeat any reform.
In the last couple of years, as lawmakers finally began to bear down, universities and lenders wrote fast settlement checks to halt investigations and campus queen Sallie Mae attempted to sell herself to private investors so the public would have no right to look into her books, a deal that collapsed as the big-time lender’s woes came increasingly to light.
A great deal of yelling and shouting will ensue this week and in the weeks to come about socialist Obama’s plan to nationalize the student loan industry and destroy competition and eliminate all the jobs supported by the student-loan sector.
The answer to the shouting is “Yes, and that’s the whole point!” Any decent new plan will save the government and the country’s students billions in empty finance-industry profits and executive bonuses. Those savings will be essential to strapped families unfortunate enough to be looking to send their kids to college in the next few years, especially if states like Colorado are forced to slash education budgets and send tuition costs through the roof as a result.