A False Alarm

The war on the money changers continues unabated! No quarter given by the NAF! Now NAF’s accusing the most venerable financial newspaper in the country of “spinning” the truth! Wow, how much spin is too much spin NAF? I’m starting to get dizzy!

Chase is offering discounted loans eh NAF? Since when is one lender representative of the health of the whole population? I see you’re using your rigorous statistical methods again to bring us the best data that suits your particular ideological bent! What you fail to mention is that Chase unlike many of its competitors has access to deposits as a source of capital. Sallie Mae, CLC, Goal, Michigan, Brazos, don’t have access to deposits to fund their loans! They must rely solely on the capital markets which, as the Journal correctly points out-are dysfunctional! Did it ever occur to you that Chase might also be attempting to take advantage of the competition’s weakness in this regard to gain market share (foregoing normal profits so that when markets do normalize they have less competition)? Ah phooey, that makes too much sense!

Borrowers with scores below 660 are going to encounter difficulties obtaining supplemental private loans NAF. Just because you think it’s a raw deal to take out one of these loans doesn’t mean that the individual does! In fact, the majority of the borrowers in the 660-620 range do pay back their loans just fine. Perhaps you should stop projecting your ideological bent here too NAF. The sanctity of individual choice is guaranteed by our Constitution. I know you’d like to have it the other way, where the Statist Direct Loan program rules the day!

Your callous comment “who cares” with respect to FFELP lenders who have exited the business is misplaced as well. The consumer voting with his / her wallet determines the most efficient provider of the good or service! They didn’t have a say in this one. The “elites” decided for them who was to be “efficient”. For instance, CLC seems to have been very efficient answering phone calls from their customers. Hard to believe huh NAF that some people pay for good customer service! Again, the individual’s rights are what are important. Shame on you and others for trampling on them!

That FFELP loans remain "universally available" does not negate claims that Congress went too far in cutting lender subsidies. The two are not mutually exclusive, since the full weight of the budget cuts and turmoil in the credit markets have not been fully felt. NAF has heard of "lag time," hasn't it? Does NAF suggest that Congress should wait until loans are not universally available--and families are hurt--before it reacts? Also conveniently overlooked by NAF is that while loans may be universally available, loan costs have increased. Getting or finding a loan for some students also is becoming more difficult. So college now costs families more, making college less affordable for them. FFELP loans, if conditions persist, could become less readily available and more expensive for some families to get. And NAF would countenance this is the name of what? Getting the government to take over all federal student loans. A sort of single lender system for federal student loans. Just as the U.S. Passport Office was the only place last summer where you could get a passport renewed.

How have loan costs increased? Borrowers with variable rate loans will see a significant interest rate decrease on July 1, 2008. Loans issued since 2006 still have the same fixed interest rate they did last month; the law hasn't changed. Borrower origination fees continue to decrease each July 1 as laid out in the Higher Ed Reconciliation Act of 2006. State agencies which have benefited from tax exemptions and "950" subsidies over the years are still offering zero fee loans, reduced-fee loans, interest rate reductions and principal reductions -- many of which do not require any on-time payments. Even on the new CCRAA loans, the "socialist" state agencies used their influence in Washington to get a higher subsidy than the banks. Rewarding the most inefficient players . . . The amazing thing is the state agencies arguing they are more capitalist than direct lending. Chutzpah!

Access to deposits? Why don't lenders have access to deposits? Regulators have warned for years about Americans' low savings rates and our resultant reliance on European and Asian capital for our consumer and business borrowing needs. Yet, there are still some deposits in our domestic bank accounts. FFELP is a federal program. It is fine for lenders to obtain the capital for their non-federal lending (car loans, personal loans, mortgages, business loans, etc.) from Europe and Asia, but we could put in a law requiring that capital for FFELP loans has to come from deposits. Otherwise, we would be saying that FFELP is basically a defunct model whose demise had been temporarily delayed by the development of securitization markets in the early 1990s. Now that these markets are hitting their second bout of turbulence (the first was 1997 Thai/Russian crisis), they want some handholding? If traditional financial markets (domestic deposits and traditional domestic secondary markets) cannot supply the needs for federal and alternative loans then the colleges will have to reduce their prices. Not all of life's problems can be solved by increasing student loan subsidies.

The sanctity of individual choice is not guaranteed by the Constitution, but, if it were, it would only include private transactions. Where in the Constitution does it say that the educated elites can reach into the pockets of the working class to increase lender/guarantor subsidies so that the elites can have taxpayer-funded "choice" in a federal government program like FFELP? Where does it say that taxpayers should fund hugely-excessive subsidies in government guaranteed lending, so that some of the excess can be sloughed off to provide additional "choice" in the purely-private alternative loan market? Who says CLC was providing good customer service? Service to whom? Not to the taxpayer. Everybody loves Santa Claus. If I came to you and said that I could cut your monthly payment by 60 percent (by stretching your payments over a longer timeframe) and Uncle Sam would pay for it, would you say no? Of course not! CLC should have been telling its customers where the money was going (and the extra interest they would be paying over 30 years). If a borrower with federal loans from med school or law school called CLC, would CLC ever say, sorry we can't accept your business because (1) all your loans are from Wells Fargo or (2) all your loans are direct loans? (And now some of the same folks are saying, what happened to all the interest projected on those direct loans that are now gone?; can't have it both ways.) History will have to be the judge of that, because, unlike 9.5, there have not been any investigations. Why investigate? If the borrower is happy, who cares, right? Well, we should care. Shouldn't we worry about raising a whole generation of individuals who only care that they are getting a good deal but don't care if it is legit or who is paying for it? Well, we will begin to worry when they decide that paying for our social security is not a "good deal" for them.

Only on the NAF blog could I hear that the Constitution of the United States doesn't guarantee an individual his / her right to choose. Our whole country was founded on life, liberty, and the pursuit of happiness for the individual free from government coercion. You should read the Bill of Rights if you still have any doubts.

You misunderstand my position on student loans. Let me be clear, private industry has demonstrated an ability to make loans to students with or without government subsidy. There is no need in this day and age to have anachronisms like the FFELP and especially the FDLP. These are collectivist programs that derive their existence from the false assertion that a college education is a guaranteed right of every American. It isn't. Moreover, a person's rationale for going to college isn't the betterment of society, it's the betterment of that individual's job prospects (the majority anyway). You can take away all the federal and state money tomorrow, and people will still go to college. But only those that perceive the benefits as outweighing the costs (as it should be). We shouldn't subsidize those people who wouldn't go to college if not for the subsidy, that's a waste of taxpayer dollars and contributes to the unhealthy college market dynamics that exist today.

It's also simply untrue to claim that any FFELP lender that is a victim of the one-two punch of the CCRAA cuts and credit crunch is inefficient, or stealing from the taxpayer. FFELP is a quasi-free-enterprise system. In a real free market, the success of a company is not determined solely by how cheap its products and services are. In a free market some people pay more for better quality and/or service when looking to satisfy a particular need like college funds. The credit crunch would be less of an issue for FFELP lenders if they could raise their prices to borrowers to compensate for the higher costs in the capital markets (they can't do that-guess who's to blame). Finally, the FDLP program (which speaking of the Constitution, seems to exceed any powers granted to the government vis-a-vis inter-state commerce) is only used by 20% of the college borrowing population. Such a low utilization rate seems to me to be a clear repudiation of the service that program provides. So when NAF and others say it's cheaper than FFELP, have a laugh, and remember that the government has exceeded its Constitutional mandate with FDLP!

Our country should stay true to its founding principles of freedom for the individual. Anytime we stray from this, it leads to disaster. You need look no further then the housing market collapse as a prime example of this. Some people have argued that part of the unsustainable increase in housing prices was the result of families driving up the demand for housing in good school districts. Since families aren't allowed to send their kids to the school of their choice (unless endowed with the money to send them to private schools) families move to communities with good schools driving up the price for housing in those communities. Other communities follow suit (even those with bad schools), and eventually you have a bubble on your hands. If Americans didn't have to spend their hard-earned dollars on the public school monopoly the situation would be different not just in the housing market, but more importantly, in educating future adult Americans as well. Socialism purports to raise the standards of living for all wherever you find it, but in the end, it does the exact opposite, and brings the standards down for everyone.

The private loan sector has shown an ability over the years to provide ample capital to law students and undergraduates with co-signers. Others were paying interest rates as high as 25 percent and/or origination fees as high as 10 percent. Some may believe that students at proprietary schools, for example, "deserve" to pay those costs because of the "high risk." That is the "free market." The only problem is that we have had 40 years of the HEA, so that students and schools have gotten accustomed to better terms, conditions and benefits than that. It is going to be difficult to put the genie back in the bottle and argue that students at some schools should pay double or triple the interest rate of those at another school.

Increases in grant programs, however, could partially insulate the needy from the impact of private lending's terms, conditions and benefits. The UN, etc., argues for moving away from grants and going to all loans, because the primary beneficiary of a college education is not society or the economy but rather the student. In the US, the student loan interest tax deduction has gradually been restored to its pre-1997 parameters, so that the need for HEA loan programs has been reduced. Of course, like other tax benefits, the taxpayer must be somewhat well-off, because you need to front the cash flow for a year or more until you file your tax return.

The office suites of FFELP participants are not dominated by titans of finance but rather former congressional staffers who use those connections to tweak the legislative and regulatory parameters. It is not quasi-free-enterprise. A side effect is to make analysis difficult because the federal program features are a constantly moving target. The significant federal education effort (including the creation of national defense loans -- now called Perkins loans) which immediately followed Sputnik was carefully tied to defense and national security, which most would argue are roles of the federal government. However, by the 1940s Congress's power under the interstate commerce was already almost unlimited -- even to regulate a farmer who was only growing food for consumption by his own family. In addition, Court decisions during 1964-66 gave Congress almost unlimited power to increase civil rights protections. It was this environment into which the HEA was created. As far as higher education finance, at the time, the GOP favored tax credits while the Dems favored guaranteed student loans. FFELP is arguably even more "unconstitutional" than FDLP because those who should know -- the founding fathers -- were among those who supported two incarnations of a national bank of the United States.

"In a real free market," but not in FFELP, there are other issues besides the cost. Imagine that the President or the Speaker of the House said that we should appropriate a pool of funds of $20 billion so that providers can seek to compete on quality and service in the food stamp program? Or $150 billion so that providers can seek to compete on quality and service in the social security program? Liberterians would say forget it, give 'em the bare minimum. How is FFELP different? It is not a voucher program. They tried that in Canada in the 1990s: Give the banks a chunk of cash for each year they issue loans (and no ongoing subsidies). The banks were expected to invest and manage those funds to cover interest rate fluctuations, losses due to defaults, etc. All the banks left the program within a few years.

For a program with absolutely no promotion that does billions in business, FDLP is almost unprecedently successful. During the few months that it was allowed to promote itself (before members of both political parties put the kabosh on that), schools were running from FFELP. In addition, the effort of the new Congress to eliminate transitional funds for the schools (successful) and to terminate the program (unsuccessful) caused a number of prominent universities to change their minds. If we were allowed to hear Pepsi's "side of the story" but Coca Cola was muzzled, Pepsi would soon have 90% or more of the business.

After 15 years of one-sided arguments, it is amazing that any schools remain in FDLP. In addition, after one year of Cuomo, etc., it is amazing anyone could talk about "service" to schools without talking inducement. As a financial aid administrator, would you choose FDLP, which imposes additional regulatory requirements but cannot provide "stuff" to the financial aid office, or would you choose a lender who could staff your office during the busy season, provide equipment, provide software, etc.? Given a separate FFELP and a separate FDLP, the mathematics are inevitable that FDLP is cheaper. The end of FDLP, however, came with the law allowing cross-consolidation, which has allowed lenders and GAs to send the worse borrowers to FDLP and has allowed lenders to cherry pick the high quality FDLP borrowers. Again, changes that were made based on a need to "compete on capitol hill" due to inability to compete on a level playing field.

If you look at the abysmally-low customer service and the high costs of FFELP in the early 1990s, it is evident that FDLP has raised the standards for all schools and borrowers, FFELP and FDLP. It has raised standards for everyone. It addition, the work is done by private sector firms. Despite CCRAA's efforts to prop up the socialistic state government sector of the loan program (by giving them higher subsidies than regular lenders), the credit crunch seems to be hitting their sources of funds and forcing them to compete for business for the first time with the banks.

The housing market is not a good example of free enterprise. As far as housing, if not for the government programs enacted in the wake of the Great Depression, 90% of Americans would still be renting. Five-year mortgages would be the norm. Who could afford it? Almost everyone who is a homeowner owes their good fortune to a government program. (The programs also woke up competition even from the corners of the market where the government is no explicitly involved.) School vouchers would not disguise the fact that the housing market has been a creation of big government itself. (It is probably true, however, that if five-year mortgages were the norm, home prices would be much less.) Furthermore, the federal tax code has favored housing for decades. One of the greatest lobbying "successes" of all time was the real estate and development industry saving the mortgage interest deduction from certain demise during the tax reform legislation of 1986. Any economic analysis shows that the deduction benefits realtors and developers and not homeowners. The deduction is built into the purchase price of your home. This deduction is now one of the costliest parts of the federal budget.

Jim, I think some of Alexander Hamilton's (the father of the national bank you describe) might be helpful..."If banks, in spite of every precaution, are sometimes betrayed into giving false credit to the persons described, they more frequently enable honest and industrious men of small or perhaps of no capital to undertake and prosecute business with advantage to themselves and to the community." Do you think Hamilton would have been in favor of nationalizing what is clearly consumer lending?

As far as the unlimited government power you describe, I'll let John Marshall's words speak interpreting the Court's decision in McCulloch v. Maryland..."In no single instance does the Court admit the unlimited power of Congress to adopt any law whatever, and thus to pass the limits prescribed by the Constitution. Not only is the discretion claimed for the legislature in the selection of its means always limited in terms such as are appropriate, but the Court also expressly says that should Congress under the pretext of executing its powers pass laws for the accomplishment of objects not entrusted to the government it would become the painful duty of this Tribunal to say such an act was not all the land." So I ask you, what enumerated powers did Congress exercise when it created the Direct Loan program? Assuming you can come up with an enumerated power or powers, the next question is: are the means selected (nationalization) appropriate? You know what I think.