Buck McKeon’s Student Loan Crony Capitalism
The Obama administration’s budget proposes to have the federal government spend billions of dollars on student loans to help students attend college. Since conservative ideology indicates that money should only be spent on killing people, preparing to kill people, and threatening to kill people it’s not surprising to learn that some members of congress are not enthusiastic about this proposal. But there’s a twist. The government already spends billions of dollars on student loans. And the Obama administration is proposing to reduce expenditures.
How so? Well right now we do student loans through a really pointless mechanism of basically laundering the money through private firms. All of the downside risk is borne by the government in case of default. And the lenders receive federal subsidies for doing the service of undertaking no-risk lending. But of course the companies also take a slice off the top for profits and salaries for executives and so forth. Consequently, this is more expensive than just directly lending the money. And the government is bearing all the risk anyway. So what Obama is proposing to do is to save taxpayers money by simply having the government make the loans. What’s not to like? Well:
But there’s already been pushback from Republicans. Rep. Howard P. “Buck” McKeon (Calif.), ranking Republican on the House Education Committee, lashed out against the proposed shift, calling it a “government takeover of the private-sector-based student loan program, taking away options and benefits from students while adding tens of billions” of dollars to the deficit.
The government is not, however, “taking over” anything. The government already completely controls the industry since it’s existence is predicated on the existence of federal subsidies. Obama is simply proposing to cut out the middle man and save some money. The tens of billions of dollars to the deficit point, meanwhile, is just an accounting gimmick. By having the government guarantee loans that formally “belong” to the private firms, a certain level of implicit liability is kept “off the books.” But the liability is still there. And the actual overall cost to the government is lower lower.
The interesting thing here is not just the particulars of the policy, but the bizarre view of the role of government that Howard is espousing. Rather than a debate between progressives who want the government to provide a public service and conservatives who want the service to exist just insofar as it can be supported by the private market, we have a debate where both sides agree that the service ought to exist but the right thinks it’s important that it be done in a less efficient more costly manner because doing it that way generates profits for people who in turn give them money in some kind of nutty sense is supposed to preserve the integrity of the private sector. And it’s not just on student loans. You have essentially the same debate over Medicare Advantage between Democrats who want the government to provide seniors with costly medical services and Republicans who want Democrats to provide seniors with an even more costly version of those services by bringing private insurance companies in as middlemen. It’s ludicrous. Now elected officials are going to get mixed up in these kind of scams now and again, much as you see some Democrats siding with campaign contributors in the hedge fund industry over the basics of progressive politics. But when Chuck Schumer pulls that kind of stunt he takes crap about it from liberals while conservatives seem too busy whipping themselves into frenzies over fake pork-barrel schemes to send mice on maglevs to Disneyland to notice what’s happening.
33 Responses to “Buck McKeon’s Student Loan Crony Capitalism”
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February 27th, 2009 at 11:14 am
Banks would have lost less money giving (not loaning) the money to students rather than investing in CDOs.
I love that the Republicans are not only advocating the higher price, but also invoking our trustworthy bankers as the ones who will provide “options and benefits” to students.
February 27th, 2009 at 11:19 am
this guy is actually my congressman. He makes me sick. After the election there were some mass protests over prop 8…he wrote a column in the local newspaper that no one protested over Obama winning, so no one should protest over prop 8. Essentially, he was comparing a presidential election to hundreds of thousands of people losing their civil rights. Guh.
February 27th, 2009 at 11:19 am
this is of course just the way to argue these issues in public, in the media. ‘we’re just gonna cut out the middleman’ is just the right frame for this. EVERYbody, including republicans and the small business types who form such a large fraction of their core, will recognize this as a tried and true cost saving strategy. Those persons might also have some students in their families who are staggering under the burden of the very expensive loans now available to them.
good one, Matt. How do we give this legs?
February 27th, 2009 at 11:19 am
“Obama’s stimulus/budget/etc is a huge expansion of government power” is the new GOP talking point. they’re going to use the phrase every chance they get, whether it’s applicable or not.
February 27th, 2009 at 11:22 am
by the way, what’s so terrible about helping the mice get to Disney in speed and comfort? these guys are cold.
February 27th, 2009 at 11:23 am
During the Bush administration, there were several instances in which the federal government would sue state governments for delivering services that could have been outsourced to a private provider (examples included public transit agencies providing extra shuttle services during sports games and the like). The Republican opposition to Fannie and Freddie’s low capital ratios in the mortgage market was not due to any kind of advocacy of fiscal responsibility but because this made Fannie and Freddie direct competitors with private banks, who had the same capital ratios.
The reason people like Bush and McKeon are against “cutting out the middleman” is because they view a situation in which a private entity could be making a profit off of some service as being a form of theft from the private sector. In their view, it is better for a private entity to be making a profit for shareholders than to maximize the delivery of a service to the public.
February 27th, 2009 at 11:32 am
Matt is largely right about student loans.
But I don’t think Matt understands Medicare at all. Medicare doesn’t “provide” services, it pays lots of other folks, public and private, to provide them. And Medicare Advantage doesn’t “provide” the same services as Medicare; participants typically get more.
Now, it may be that Matt would prefer to have doctors working for the federal government, and it may be that the left will be successful in the push for that. But it isn’t an accurate description of the program today.
February 27th, 2009 at 11:36 am
It is not as disgusting as the privatization of war under Bush, but still a bit disgusting.
Public money to private, favored contractors is the new GOP credo.
February 27th, 2009 at 11:39 am
The government is not, however, “taking over” anything. The government already completely controls the industry since it’s existence is predicated on the existence of federal subsidies.
Indeed. That’s also what conservatives said about the mortgage industry’s relationship with GSEs.
February 27th, 2009 at 11:39 am
I guess I should clarify–some conservatives I think did raise flags about it ahead of time, but blaming Freddie/Fannie for the crisis was more an after-the-fact talking point.
February 27th, 2009 at 11:44 am
Yeah, Republican Congressmen are corrupt scumbags who fuck the average taxpayer on behalf of special interests –
but that’s the price we have to pay for having them around to keep Obama from taking our guns away:
http://thehill.com/leading-the-news/obama-administration-revives-assault-weapons-debate-2009-02-26.html
Freedom don’t come cheap.
February 27th, 2009 at 11:47 am
And so the Sallie Mae lobbying effort begins. As a student aid officer, let me just say color me not surprised. I mean, why should college students and their parents not have the privilege of paying the higher interest rates and higher origination fees of the FFEL program and the lender lobbyists lose their ability to corrupt the student loan system the same way they have with the mortgage industry in exchange for the obviously inferior Direct Loan program’s efficiencies and cost savings to both tax payers and borrowers? I mean seriously, folks. Can’t allow that, can we?
February 27th, 2009 at 11:50 am
“Obama’s stimulus/budget/etc is a huge expansion of government power” is the new GOP talking point.
So, make fun of it.
“I’m sorry, cutting out the middleman is now big government? Is it that you don’t like the idea of saving money, or that you don’t like Obama?”
Now, it may be that Matt would prefer to have doctors working for the federal government,
“So, when government pays a private insurance company to pay doctors it’s capitalism, but when government cuts out the insurance company middleman and just pays the doctors directly, it’s evil big government?”
If “shrinking government” means “adding a private sector middleman,” it’s no wonder we ended up with trillions in deficits during a time of prosperity.
February 27th, 2009 at 12:20 pm
Sallie Mae is evil. I have no problems with paying off my student loans, but they reamed me due to their incompetence and now I am paying about 5k more over the life of the loan than I need to.
Government should take this over. There is total corruption in how banks are more or less paying universities to recommend them (sometimes exclusively, I believe) to their students, thereby using market-coercion to limit the very options that Repubs are inaccurately arguing currently exist. And market-driven universities bend over and grab their ankles, take the money off the nightstand when it’s over, and then pass the costs on to their own students.
February 27th, 2009 at 1:08 pm
“You have essentially the same debate over Medicare Advantage between Democrats who want the government to provide seniors with costly medical services and Republicans who want Democrats to provide seniors with an even more costly version of those services by bringing private insurance companies in as middlemen.”
Matt’s ignorance is on display again. If Medicare Advantage provided a “more costly version of those service” nobody would make that choice. Medicare Advantage is an option for seniors, and one some of them take because it typically offers additional service coverage.
February 27th, 2009 at 1:20 pm
If Medicare Advantage provided a “more costly version of those service” nobody would make that choice.
talk about displaying your ignorance!
the debate is over the cost to taxpayers, not to the recipients. the GOP wants to keep insurance and drug companies fat and happy, the Dems would like to be able to bargain for lower prices.
February 27th, 2009 at 2:23 pm
In this post Matt gets to the heart of the entire, unstated purpose of the last 25 years of privatization we’ve seen. This has happened in sector after sector of government, at every level. Some Republican decides that the market can more efficiently deliver a service the state has been providing. A “contractor” is brought in with an initial lowball bid. The government program is shut down.
A couple of years go by and, quite unexpectedly, the cost of the contract goes up. But now it’s too late to get the government back in the business. The entire infrastructure that used to provide the service is gone, and it will cost millions to build it back.
The entire purpose of privatization has always been to rob the taxpayers for private gain. Privatization has failed across the board. Poorer service for more money. That’s what it buys you.
My hope is that this is an initial step the Obama administration is taking to take back over privatized services and thereby save the government billions. If only someone could start a movement like that here in the state of FL.
February 27th, 2009 at 3:02 pm
talk about displaying your ignorance!
the debate is over the cost to taxpayers, not to the recipients. the GOP wants to keep insurance and drug companies fat and happy, the Dems would like to be able to bargain for lower prices.
Total ignorance of the Medicare reimbursement structure on display here.
February 27th, 2009 at 5:38 pm
<Would anyone object to doing the same with military spending. Please let republicans explain how only halliburton could run a chow-hall or deliver clean water.
” Rather than a debate between progressives who want the government to provide a public service and conservatives who want the service to exist just insofar as it can be supported by the private market, we have a debate where both sides agree that the service ought to exist but the right thinks it’s important that it be done in a less efficient more costly manner because doing it that way generates profits for people who in turn give them money in some kind of nutty sense is supposed to preserve the integrity of the private sector. And it’s not just on student loans.”
Please, let them explain Halliburton, dyna, blackwater, etc……
February 27th, 2009 at 6:21 pm
I’m one of Buck McKeon’s constituents. Please, please, PLEASE keep the heat on this guy. He has no serious Democratic challenger so he’s evolved into the worst kind of lock-step Republican. Your story is just one example. If someone were to shine a little light on him, he’d evaporate.
February 27th, 2009 at 11:56 pm
The ‘public private partnership’ loan guarantee program that you propose reforming or doing away with for student loans is the *exact* same mechanism just proposed by CAP for the Clean Energy Corps. For that matter it’s the almost exactly the same mechanism as Freddie Mac / Fannie Mae (I am actually not sure anymore where either of these organizations stand or how they’re supposed to work)
Do you propose making these just direct lending facilities as well?
February 28th, 2009 at 4:35 am
Current and former students are being raped everyday by the likes of Sallie Mae —all at the approval of Congress. This problem is a sub-prime loan problem that is affecting our economy and removing hope for young adults who are servants to Sallie Mae. If you are not aware of this then you do not have a Sallie Mae loan. Anyone who does is fully aware of how horrible the private loan system is and how it is set up to take extreme advantage of young people. This needs to be fixed and I applaude the Federal government for taking this first step to correct it. They need to go much further though and correct the wrongs that have been done so far to our young adults.
February 28th, 2009 at 8:53 pm
Wow – Where to start…
Do you really want Arne Duncan managing one of the largest lending entities in the US – What is his experience being in charge of a loan company?
What is proposed is for the government to add $85 billion a year to the federal debt – plus interest. Have you guys thought about that cost? The cost to the US government of borrowing each additional $100 billion rises incremental. The more debt we borrow – the more it costs to finance the entire debt. So not only will we be paying interest on the federal debt for these loans – it will increase the cost of all other debt on the federal books – costing even more.
Finally – choice has driven service and benefits, in both the FFELP and Direct Loan program – as it does in any arena. Once the FFELP (private bank participation) is gone, all that will be left is the Direct Loan Program – without any competition. Schools and students will have no other place to go if (when) service starts to decline.
The costs advantage the DOE has in operating their program vs. FFELP student loans is primarily related to the lower costs of funds for the US government when raising capital. Otherwise, the FFELP program is more efficient and provides better service – Sallie Mae excluded.
The bottom line: Try calling Direct Loans to see what kind of service you get. Ask a couple of simple questions and see how educated their call center reps are. The call some FFELP lenders and see if you don’t get better answers from more qualified reps. Then post back with your results…
March 1st, 2009 at 3:06 am
I hear FFELP lenders spend most of their time blog trolling
March 1st, 2009 at 4:15 am
We have both Federal Direct loans and private student loans through Sallie Mae. Hands down….the Federal loans serviced by the US Department of Education are much, much, much, better in every regard including dealing with them on the phone regarding the loans. There is no comparison. They do a far better job than private lenders. There is no cost advantage and actually a big negative to having private lenders in this business. Their rates are much higher, their service much poorer, their collection techniques are horrible. No, unless you have walked the walk, you cannot talk the talk. Sallie Mae needs to go away and the Federal government needs to take back all Federal guaranteed loans. Sorry, it’s the truth. And yes, FFEL lenders do spend their time blog trolling and writing responses to rebut the truth.
March 1st, 2009 at 9:56 pm
Since conservative ideology indicates that money should only be spent on killing people, preparing to kill people, and threatening to kill people it’s not surprising to learn that some members of congress are not enthusiastic about this proposal”
I wonder if you will get Sullivans Moore award.
March 2nd, 2009 at 12:53 am
Wow – Where to start…
Your impending unemployment seems like a good place.
Sorry about that, but when you work for vampires, them’s the rubs.
March 10th, 2009 at 7:38 am
The corruption and greed of this industry has been it’s undoing – like many others. Difference here is that the industry was subsidized during the greed and arrogance, not after as we’re seeing in Autos, Insurance (AIG), or the banking/mortgage/brokerage industry.
In 2008, the student loan industry spent more on lobbying than all other sectors of the financial “industry.” Why? To protect the skim job they so enjoy.
Everyone was all indignant when the auto industry showed up in D.C. with hat in hand via their corporate jets. Where’s the uproar over taxpayer subsidies fueling up the THREE corporate jets at Sallie Mae?
The Salle Mae CEO doesn’t even have the self-discipline to handle an investor conference call without using vulgar language – and subsequently tanking SLM stock.
The loan officers who lost their jobs are the worst scum balls. They were entrusted as state institutions such as Univ. of Texas or venerable private institutions such as Columbia, USC, and Johns Hopkins. The NASFAA defended these dirt balls all the way to the end – and today, the complicit NASFAA falls on the side of the lenders, not the students. Guess they believe the Caribbean junkets might come back!
Then there are the politicians – the Buck McKeon’s, John Boehner’s, and Lamar Alexander’s all at the trough of Student Loan money in the form of campaign and leadership PAC contributions. Money that pays for their positions and subsequent votes that protect the money skimmers all the while leaving student loan holders with the least amount of rights or protections of any other form of credit in our economy.
The loan providers (Sallie Mae, Nelnet, etc.) make the most money from default. When a loan defaults, the lender gets to add fees, late penalties, and then crank the interest rate to 18% or more (well above the guaranteed rate at origination). These fees are then capitalized. When they have been run up adequately to pay for corporate jets or private golf course, they put that loan back to the taxpayer – many times at double the amount guaranteed in the first place.
Yes . . . this is an industry ripe with scum. It’s time to drain the pond.
To read more – Sallie Mae’s political strategy leaked and is posted online – read here – it’s fascinating how arrogant these poeple have become. (note, this is a pdf)
http://www.newamerica.net/blog/files/Sallie%20Mae%20Strategy%20Document.pdf
March 14th, 2009 at 12:28 am
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