Your proposals sound like Communism.  Now banks will have to choose whether to offer student loans or provide resources to a school?

My daughter has already seen her student loan borrower benefits canceled and her interest rate increase since these "inverstigations" began. Al l congress did by reducing the lender subsidy is to take away these benefits. Great job everyone.

One of my most conservative friends is always advocating deep cuts in government budgets -- as much as 40%.  While I have always been skeptical, he is convinced that service becomes better and organizations become more efficient when they are forced to live with less.  We are seeing these principles come true in the student loan business.  In non-govt student loans ("private" loans) we are seeing that troubles in the overall credit market are perhaps resulting in a return to the days when only the most credit-worthy students could obtain private loans:  undergraduates with co-signers and professional students with higher potential for future earnings.  While this may cause disruption in people's lives and even tragedy, it is not communism; it is capitalism at its most ruthlessly efficient.

In the guaranteed student loan marketplace, reductions in taxpayer subsidies are forcing elements of capitalism into a sector that has long been anything but.  Firms that got into the business chiefly for the govt benefits are perhaps leaving.  Survival of the fittest.  Even the fittest are possibly tightening their shops.  Consolidation lenders may go back to the days of focusing their product narrowly.  We are already seeing this.  On the other hand, people are forgetting what the purpose of these programs is.  Not so that students at schools with low default rates can get potential access to borrower benefits.  If policy makers wanted to have a loan program where students at some schools had official interest rates and official fees much better than students at other schools, they could have done this long ago.  A much easier program to run.  No, this was determined to be a uniform national program.  True, lenders are always free to charge a lower interest rate than the official maximum.  Did anyone really do this?  You could count on your fingers the lenders who offered a lower interest rate from day of origination.  By reducing the lender subsidy they reduced the cost for the taxpayer and restored the idea of a national program.  Why would a waitress or a coal miner want to pay tax so that a law student could get borrower benefits on a guaranteed student loan that are better than someone at a community college?  Makes no sense?  All the alleged borrowers benefits were doing was giving back some of the excess subsidy to someone -- and not necessarily the someone that policy makers would have intended.

Jim, the tone of your post is equality of outcome which has traditionally been associated with a socialist system.  There is simply nothing capitalist about Congress deciding to cut the lender subsidy.  It wasn’t done to promote a uniform interest rate, or promote capitalist efficiency, it was a punitive action designed to win votes.  Federal student lending has become an entitlement.  What better way to win votes in an election year than to tout 3.8% interest rates and lenders being put out of business?  FFELP lending has attributes of capitalism and socialism, and there is tremendous friction between the two. 

Take your comments on lenders reducing the rate to the borrower.  Why did they not do this?  FFELP lenders don’t want to run afoul of the paternalistic anti-inducement laws.  You can’t offer a borrower a rate reduction from day one on a FFELP loan.  That could be considered an unlawful inducement (just like you can’t reduce the principal, and so on).  Lenders did reduce rates for people who paid on time, which is the only way they could legally do it, thereby tying the rate reduction to good borrower behavior (e.g., the consecutive on-time payments reduction, and the ACH reduction).  The inducement constraint is pure socialism, not to mention idiotic and hypocritical.  How many times do you go the grocery store and receive coupons to purchase certain groceries?  What about flyer miles on your credit card?  How about the program Ford Motor Company had a few years back for discounts on cars for college graduates?  What about retailers conducting their regular sales?  These are all inducements to purchase a good or service and such inducements are illegal when it comes to student lending.

We should stop the deceit and subterfuge on this issue and come clean with the truth.  If we want student lending to be an entitlement then so be it, bring on the Direct Loan Program!  If we don’t want it to be an entitlement, then we need to reassess the role of the government in the space.  I suspect it would be a difficult sell for complete socialization if Americans had a better handle on exactly what the facts are with student lending.

FFELP is essentially a voucher program from the point of view of participants.  Lenders are guaranteed certain federal payments, and if those payments (plus other revenues) are greater than their costs then they have earnings.  Reducing those payments increases the capitalistic nature of a system which was admittedly not completely capitalistic.  This is a social program.  Back before the HEA some states did already have their own guaranteed student loan programs and it was understandable for the program features to differ from state to state.  FFELP is a national program where the program features should not differ from state to state.  In fact, before direct lending the complaint was that the program was actually too uniform; every lender charged the maximum statutory interest rate and maximum statutory origination and guaranty fees.  The benefits began as a way to put direct lending out of business and would likely end after that point.  The one exception is the state lenders which have a lower cost of funds than the banks and also have had the benefit of a 950bp gross yield on a substantial portion of their portfolios.  The tax code requires them to spend excess yield or else hand it over to the IRS; some of the spending has been used for zero fee loans, immediate interest rate reductions, principal reductions and other benefits not typically offered by regular banks.

The train has left the station on the idea of a fully-means-tested guaranteed loan program only for low-income families.  MISA in 1978 took care of that.  It has been a middle-class entitlement for 30 years.  If we could get colleges to roll back their prices in real terms to 1975 levels then maybe we could turn back the clock.  It is too late.  Americans are no longer used to the idea of financial aid only for low-income families.  Furthermore, the politicians would argue, similarly to social security, that including middle income families in the federal aid programs has actually helped maintain the political support base of a group of programs which otherwise may have been repealed many years ago.  On the other hand, winning the support of the American voter often seems irrelevant with federal programs.  As George Will has pointed out, a program that costs $25 per year per voter will not arouse much outrage among the electorate if you keep that program going year after year, while any attempt to reduce/eliminate that program will attract vociferous lobbying from the handful of companies and organizations involved in that program -- each of which could lose $millions.  Thus, over the decades Congress and several Presidents had enhanced subsidies to lenders and guaranty agencies despite the lack of apparent rationale for the public interest.  How is reducing subsidies suddenly a vote getter after all the decades?  Where were the demagogues when subsidies were increased in 2002 for example?

What are the options to idea of the student loan program as a middle class entitlement?  1. Return to the Great Society concept that social programs are for the poor, and everyone else should get out of the trough.  2. Go more in the other direction and loan only to credit-worthy students/students at "good schools"/students with the "right" majors/schools with low default rates (pick your favored categories). 3. With the student loan interest deduction restored almost to its pre-1998 stature, eliminate the federal role in student lending and go to 100% private lending, leaving any remaining federal involvement to the regular banking regulation agencies.

Anti-inducement laws, similar to the antitrust laws of nearly a century ago, are there to save capitalism not end it.  Without reforms such as the antitrust laws, capitalism in the USA could have easily ended in the early 1900s; socialst candidates were receiving substantial vote counts in local, state and national elections.  In any case, anti-inducement means a lender doing "something" to get a school's business or a guarantor doing "something" to get a lender's business.  Some lenders provide borrowers with zero fee loans, immediate interest rate reductions and principal reductions without getting accused of "inducement."  While giving a student an actual check in exchange for getting a loan would seem to be an obviously prohibited inducement, this occurred openly in the 2000s.

Yes, FFELP is built on a paternalistic model that all students are 18-22 with no credit experience and need the heavy handed guidance of the financial aid office and the availability of Big Brother in Washington.  If you get rid of the paternalism, you have no FFELP and you go to 100% private lending.  This is also why the "consolidation for financial planning purposes" so common in the 2000s is so utterly incompatible with the existing federal program.

I can't compete with your historical perspective but I must say, how is it not a vote getter when we hear it touted at every political opportunity?  Are you seriously making that contention?  I guess this nonsense has nothing to do with votes:

CLINTON PLEDGES TO “PROTECT STUDENTS FROM PREDATORY LENDING”
Sen. Hillary Clinton (D-N.Y.), in a fierce race with Sen. Barack Obama (D-Ill.) for their party’s presidential nomination, said in a campaign speech last week that she was putting “private [student] loan companies on notice” and that as president she would hold them “accountable” for “predatory lending practices.” The comments Clinton made during the Friday speech in South Carolina are similar to those she has made over the past few months, in which she has decried the amount of average debt students carry and vowed to do away with the Federal Family Education Loan (FFEL) program in favor of the Ford Direct Loan Program. Clinton also said she would direct more money to schools that serve “large proportions of low-income students, as well as to the Strengthening Historically Black Colleges and Universities fund and to Hispanic Serving Institutions (HIS).

What is the reason for getting rid of FFELP now?  The gutted FFELP is less expensive for the taxpayer than FDLP isn't it?  What is the reason?  Is the FFELP market disfunctional (note to self: with the CCRAA reductions and credit crunch maybe I'll rethink this one)?  Is it not providing the statutory interest rates required by law?  If the answers to the latter two questions are no and yes respectively, then how can we not conclude that statements like the above are not political manipulation?  One more thing, does anybody really believe that the CCRAA has made college more affordable for everyone?  I've said it many times before and I'll say it again, FFELP lenders and private lenders have been thrown under the bus this year (last year) while schools have received what amounts to a slap on the wrist.  The cost of college isn't determined by "predatory lenders".      

As for borrower benefits, I can tell you from first hand experience that giving a borrower a rate or principal reduction from day one on a FFELP loan was considered by some to be a prohibited inducement.  As for the origination fee reduction, I believe that had its genesis in the direct loan program.  FFELP participants took the lead from the direct loan program when they began to offer that benefit to their borrowers (even Citizen Cuomo would be hard-pressed to call it an inducement in FFELP when the government itself sold it through FDLP).

I also disagree that 18-22 year olds should not be treated like the adults the law and society considers them to be.  If you can vote and carry a weapon for Uncle Sam at age 18, you ought to be able to shop around intelligently for a student loan. 

There is nothing wrong with capitalism Jim.  Capitalism is just fine and a better alternative to socialism.  Crony capitalism is the problem, and is easily fixed if the electorate starts to hold their politicians accountable to them and not special interests.       

Until all the Cuomo publicity and the Bush Administration's call for deep reductions in payments to lenders and guarantors, where were Hillary and Barack?  They have jumped on someone else's bandwagon over the past year or so.  Those photo ops in Upstate NY with Hillary and Sallie Mae touting the benefits of bringing new jobs to a depressed region are now a forgotten memory?  Even that darling of the liberal intelligensia, Sen. Jeffords, was an adament supporter of FFEL and opponent of DL.  How many Congressmen have switched position (to pro-FFEL) over the years to improve fundraising for a potential Senate bid (NJ, hello?)?

The paternalism sarcasm was missed.  The average age of the postsec student is pushing 30.  While the majority of the disbursement dollars may still be to those in the early 20s, the point is that the HEA is based on premises, some of which have long disappeared.  Nevertheless, it is not up to program participants to take it upon themselves to change federal policies unilaterally.  If lenders believe that paternalism in the HEA is an outdated concept, then they should lobby for program-wide changes (not just consolidation changes) in Washington.  Policymakers bear just as much blame for "crowd-pleasing" patchwork changes, such as repealing single holder while not addressing the necessary conforming changes to the programs as a whole.

For those who believe that paternalism never should have been in the program in the first place, even when it was predominantly 18-22 year-old borrowers, then the new financial information proposals make sense.  They will allow consumers to compare and contrast, as they do for automobile loans and mortgages.  While those loan disclosures can go on for pages and pages, they do provide info that you don't see in guaranteed student lending.  I'm sure those who continue to make the argument that more than 1% of borrowers have access to "borrower benefits" would have no problem with lenders of Stafford, Plus and consolidation loans including a mandatory disclosure providing:  a detailed description of the borrower benefits, including which schools' students get better benefits, which get worse benefits; an estimate of what percent will qualify (for example, for on-time incentives); a description of missed-payment grace periods; a detailed description of the lender's capitalization practices, including which schools' students get better capitalization terms and which get worse; a clear description of who the lender is, address, telephone number, web site and so on; description of the lender's practices for sales of loans and what happens to terms, conditions and benefits when loans are sold.  For some lenders, particularly consolidation lenders, the borrower benefits and capitalization practices might vary not by school but by borrower balance or credit measure; this would need to be disclosed as well. 

Of course this would mean an end to the common practice where borrowers cannot learn the terms and benefits of a consolidation loan without first entering an SSN on-line (which facilitates the lender accessing the customer's credit information and nslds information).  On-line consolidation lending itself would either come to an end for the time being, or they could use one of those screen sensors (common in software licensing) which can prove that the customer has read the entire disclosure (or at least scrolled through it).  Of course there would need to be a way for the regulators to test it without entering an SSN . . . No, it is not clear that CCRA did a lot to make college more affordable.  Nor did the Deficit Reduction Act/HERA do much to reduce the deficit.  If anything it was a last gasp of the undefeated FFEL advocates, by additionally handicapping the functioning of DL.  DL must be doing something right if it inspires such animus and bitterness in the hearts of the cronies.  Congress can (and has) called numerous hearings to get details on DL.  There is accountability.  In FFEL you can't even find out the basic financials of most lenders; in many cases the customer can't ascertain the true identity of the lender, where it is located, the marketer, the financier, and so on.  Yes, it is clear that accountability could be improved astronomically if the electorate forces their politicians to focus less on the special interests.

Schools received a slap on the wrist at best.  Meanwhile they continue the spiel that they are "overregulated."  Easy solution to that conundrum is to refuse govt funds.  Companies like Microsoft and Starbucks could make a strong argument that they are much more heavily regulated than postsec schools.  Who are the schools, though?  To make a gross generality, the locus of the inflationary spiral (i.e., inflation far above the general inflation rate) from 1975 to 2000 was the private not-for-profit colleges and proprietary schools.  As of 2000 the state institutions were generally quite affordable.  After 2000, this began to change.  The sticker prices of community colleges and state 4yr colleges began to increase rapidly.  All of a sudden Washington takes notice?  Why?  Politics.  State colleges are perceived to be bastions of unions, political correctness and other symptoms of rampant liberalism.  Washington's sudden interest in controlling the price of college was thus not taken seriously.  The states also fought back, claiming that the Bush Administration's fiscal policies were the direct cause of the increase in state institutions' sticker prices.  True, there was a recession that reduced state tax revenues, but recessions have occurred before.  Clearly a "cost control" effort that focuses only on public institutions or only on private institutions will not be taken seriously.

Can any of these schools (either public or private) be considered truly "capitalist"?  What is the purpose in trying to put a square peg in a round hole?  All money is green.  In a simple example, an organization which gets all of its revenue from a single govt grant and finishes the year in the black is a successful capitalist organization.  Is University of Michgan less capitalist than University of Phoenix or Stanford University?  Who is to say?  How many schools would remain if they were all required to provide federal matching to participate in FFEL or DL?  We know that schools were not pleased having to prove they receive 15% of their revenue from non-federal-aid sources, so it was changed to only 10% in 1998 and still continues to get watered down definitionally.  How many schools would remain if they were all required to prove they receive one-third of revenue from non-federal-aid sources?