When President Obama signed the Student Lending and Fiscal Responsibility Act today, it dealt an enormous blow to Wall Street banks. He deserves huge props for that. I’m not sure people know how big a victory it was. Sallie Mae spent $3 million on lobbyists last year, and got none of what they wanted. Zero, zip, nada (largely because lobbyists like Tony Podesta and Jamie Gorelick screwed up, but we’ll get to that later). Nonetheless, Sallie Mae’s stock soared to a 52 week high upon passage of the bill. His student loan reform package represents, in essence, a “public option” for the student loan system, and demonstrates why proponents were fighting so hard for the same thing in the health care bill.
But it almost didn’t happen.
Let’s back up for a minute and talk about exactly what did happen, what Obama did and why he deserves credit for it. Glenn Beck and Jim DeMint, so-called libertarian “populists” who are supposed to be against government subsidies, are both pretending that this is a “government takeover” of student lending, and that it shuts down private lenders altogether. As if. (I guess Sallie Mae got their money’s worth for the donations they made to DeMint’s campaign.)
What Obama put an end to was not “student loans,” but a giant corporate welfare scam that subsidized the losses of private lenders like Citigroup, JP Morgan and Sallie Mae, who padded their profits by jacking up fees before unloading them on the federal government. Those fees could easily double the loan amounts that students eventually had to pay off.
The federal government was already subsidizing private student lenders with the guarantee that they would absorb the losses if students went into default — a classic “privatize the profits and socialize the losses” program of dubious value even when the banks were lending their own money. But in 2008, when the secondary market for student loans dried up, the government began propping up the industry with the passage of the Ensuring Continued Access to Student Loans Act (ECASLA), which provided $112 billion to buy up the loans of private lenders. The banks were no longer using their own money to make those loans. Jon Walker called it “one of the most corrupt forms of lemon socialism ever created,” noting that “the government stepped in to bailout a fundamentally unsound industry that has been for years wasting billions in taxpayers’ money.”
Meanwhile, the government was also offering direct student loans — as opposed to using Wall Street banks as a pass-through. And in 2006, George Bush’s budget report found that for every $100 lent by private lenders like Sallie Mae, the cost to the government was $13.81, whereas through the direct loan program it was $3.85. There is simply no way you can make an honest “fiscal responsibility” argument for the perpetuation of private government subsidized lending, as DeMint and Beck have done. Absolutely none. They retreat in those moments into a philosophical opposition to “big government,” but their fantasy utopias require that taxpayers subsidize Wall Street banks at ungodly multiples.
The honest libertarian argument would be that the government shouldn’t be underwriting student loans at all, which would mean the end of both private lending subsidies and direct lending. But they aren’t making that argument. Through direct student lending, the government estimates that its origination costs are $5.50 per loan. But when the government buys up loans made by private lenders through the ECASLA program, they pay a $75 fee per loan. Masaccio ran the numbers and estimated that in 2009, that represented a $532 million gift to Sallie Mae from the federal government.
President Obama’s plan represents a savings of $61 billion over the next ten years, much of which is achieved by cutting out needless layers of bureaucracy at the state level that DeMint and Beck pretend to support. State guarantee agencies occupied an “arcane and largely vestigial role in the loan process,” according to the Quick and the Ed. But Beck and DeMint were obviously anxious to see them continue to soak up fat fees for doing almost nothing.
But as I said earlier, it almost didn’t happen. In the final days before the House voted on the health care bill, we launched a campaign to include the student lending bill in the reconciliation process because we knew Congress was not planning to. The White House was fearful that if they tried to do both student lending and health care, they might screw up health care. But if they didn’t pass student loan reform now through reconciliation, Congress would not be able to pass it until next year, as there weren’t 60 “Aye” votes in the Senate, and that would be the next opportunity for passing it with 50 votes.
Fortunately, Obama decided to roll the dice. Whether it was because he didn’t want to piss off students at 12,000 community colleges across the country whose institutions badly needed the money, or because he wanted to cannibalize $18.5 billion to pay for the union deal on the excise tax, or because of pressure brought to bear by campaigns like ours, or just because it was the right thing to do, or all of the above — he did exactly what he said he was going to do. There was no “Sallie Mae compromise,” something that lobbyists like Podesta and Gorelick were pushing for, which would have allowed the big banks to continue to make loans and then sell them to the government within 100 days — again, at $75 a pop.
DeMint and Beck may think that’s some kind of “free market” bargain, but most honest brokers know that paying a company $75 for something you can do for $5.50 is a scam. Sallie Mae and Citigroup can continue to originate student loans until the cows come home–they just can’t manufacture profits by jacking up fees and then dumping their losses on the taxpayers.
Glenn, you’re right to be concerned about this stuff but you’ve got it all backwards. This isn’t a government take-over of student loans. Government took over the student loan industry more than 20 years ago when they created a cheaper product subsidized by our tax dollars. (Federally-insured loans now dominate the industry. If you’re going to college then you will pick federal loans over private ones because they’re cheaper and easy to manage.) This is just a move to make the system more efficient and less corrupt so that less of our tax dollars are wasted on corporate profits.
At the same time that FDL was running our “Students not Banks” campaign (which I believe we ran for a few thousand dollars we raised plus some money left over from health care), the Sallie Mae lobbyists were picking off one Senator at a time to support their “compromise.” Don’t ask me how it happened, but they simply didn‘t see the truck coming. While anyone with the ability to dial a telephone could’ve figured out with a couple quick calls that the Senate HELP Committee was writing a reconciliation-friendly bill with the hope that the House would vote on it when they voted on health care, somehow that missed their attention. They kept bribing urging Senators to add amendments to the original SAFRA bill passed by the House — which had to be rewritten to stand up to the Byrd rule.
I shrugged my shoulders, said “okay whatever,” decided I wouldn’t bust anyone but scratched my head in wonder that anyone would charge $3 million a year and be that ungodly stupid about the reconciliation process. Because anyone with even a School House Rock knowledge of basic civics could’ve told them that their plan wasn’t going to work unless the Senate took up the bill at a later time outside of reconciliation. And you didn’t have to be exceptionally wired-in to know what as going on. The student lending blogs were pretty much talking about it openly.
On March 11, I thought the campaign had failed, as did most other close observers. It looked like Obama wasn’t going to risk health care by trying to pass it. It miraculously came back to life for reasons unknown. Kent Conrad and George Miller got into a huge fight because Conrad insisted on using a new CBO score that estimated savings at $61 billion rather than the $87 billion made at the time the House passed its initial version last year, even though its validity was open to debate. Students lost. Conrad won.
We began a campaign in North Dakota to put pressure on Conrad. And one of the more satisfying moments in running this blog came on March 18, when the reconciliation-friendly version of the House bill dropped. At the same time that Jamie Gorelick and Tony Podesta were no doubt mouthing “oh shit” and dodging calls from Sallie Mae, Jon Walker read the bill and saw that Kent Conrad had inserted a nice little carve-out for himself — the only banks that got a “Sallie Mae compromise” and the continued ability to lay off their loans on the government were state-owned banks.
“Guess which is the only state-owned bank in the entire country–that’s right, it is the Bank of North Dakota,” wrote Jon.
Within hours, Conrad’s staff called the House and told them to pull his own personal “kickback” from the bill. Behold the power of Jon Walker.
Contrary to the predictions of both the big banks and the conservative pundits who love them, when SAFRA passed, it did not mean the demise of student lenders. Far from it. Sallie Mae’s stock soared after the bill passed. Why? Because the government contracts loan servicing out to private companies. Sallie Mae and other private lenders will bid competitively for those contracts. That’s the way it should be. Nelnet’s servicing business was up 13% last year based on the contract they won to service government loans, and when they made that announcement, their stock got a boost, too. That’s the value that private companies add. Being middle men for loans that the government quickly assumes adds no value.
That kind of a dubious business model also makes investors nervous. The other reason Sallie Mae’s stock took off is because the company will now be consolidating their operations, and doubts about the ongoing viability of their business model have disappeared. Their profits are no longer derived from rigging the system, but from providing a service that will have to compete in the marketplace based on quality and performance. Wall Street actually trusts that.
The health care public option died for many reasons. The President didn’t have confidence in it enough to fight for it, and maybe he just didn’t think he could overcome the demagoguery of the Becks and the DeMints who were making the same crap arguments about “socialized medicine” that they were about “socialized student lending.” They were able to poison the national dialog and prevent any genuine argument about “fiscal responsibility” from entering the debate.
But Congress has just created a health care system that is every bit as much “lemon socialism” as the student lending system they just ditched. The government will subsidize the same burdensome inefficiencies in the insurance industry that didn’t work in student lending, and they’ll need to revisit health care reform again. And at that time, we very much hope that President Obama will be able to point to the tangible success of his student lending program to overcome the dipshit faux populists and their amped-up rhetoric about “socialism” to demonstrate how true “fiscal responsibility” works.
N.B.: I don’t know how I got through that whole post and didn’t congratulate George Miller, Tom Harkin and their staffs for the heroic work they did, but they deserve massive credit. It was an incredible accomplishment.