Friday, April 02, 2010

This They Got Right

There'll be no carping today. The Democrats in Congress, the White House, and, yes, even the "center-left" editorial board of the Los Angeles Times got it right with respect to the new laws on federally funded student loans.

The federal government has spent extraordinary sums each year for student loans that helped put more Americans through college. But much of that money, it turns out, has been wasted. Unbelievably enough, the government has spent billions on interest payments to private banks instead of on needy students. This wasteful and at times scandal-plagued expenditure of taxpayer money finally ended with the approval this week of the federal budget reconciliation act. The new law will eliminate the private-lender subsidy and have the government make loans directly to students.

The change is expected to save more than $60 billion over 11 years, money that will be plowed into more student aid.

Up to now, the federal money was used to subsidize interest payments to the private lenders who actually made the loans. The government also guaranteed the loans. This has been a lucrative, risk-free profit center for private lenders, so desirable a business that they at times provided kickbacks to universities that would list them as preferred lenders. In some cases, financial aid officers at certain colleges held stock options in lending companies. After accusations by the attorney general of New York, several lenders and universities paid fines and agreed to a new code of conduct.
[Emphasis added]

Once again, we've had to learn the hard way that outsourcing government functions to the private sector doesn't save money or increase efficiency. In fact, it winds up costing us taxpayers a whole lot more money. In this case, it also cost students a whole lot of angst when it came to paying that money back after graduation at interest rates that are just a tad higher than the new law will allow.

The banksters fought hard against the bill, lobbying Congress intensely right up to the last minute. This time it didn't work. The record of shoddy and downright illegal practices finally caught up with them. Republicans tried to stop the bill, but even their efforts were half-hearted at best, probably because the health care bill provided them with better ammunition.

And this time the L.A. Times didn't equivocate or engage in any false equivalencies.

Any smart business leader knows that to cut costs, you cut out the middleman, yet this system persisted for years after the public became aware that billions of dollars were being spent to create banking profits rather than a better-educated nation. The profits in the student loan business were good enough for lenders to invest in lobbyists and campaign contributions, largely to GOP congressmen who now complain that the new law is a killer of private-sector jobs. In fact, the jobs were private sector only in name; they were paid for by taxpayers.

That's more like it. In fact, I'd say we need more like it from Congress and from the Times.

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