Posted by Kenneth Anderson:
The Student Loan Secondary Market:
http://volokh.com/archives/archive_2009_09_06-2009_09_12.shtml#1252775590
Lost in the shuffle among health care cost debates, the future of
Fannie and Freddie, Ginnie Mae, the FHA, and so on, the student loan
secondary market is quietly shifting to become a federal government
monopoly. The Wall Street Journal notes this in an editorial today,
September 12, 2009, [1]"The Quietest Trillion." The title?:
The furor over President Obama's trillion-dollar restructuring of
American health care has left his other trillion-dollar plan
starved for attention. That's how much the federal balance sheet
will expand over the next decade if Mr. Obama can convince Congress
to approve his pending takeover of the student-loan market.
The Obama plan calls for the U.S. Department of Education to move
from its current 20% share of the student-loan origination market
to 80% on July 1, 2010, when private lenders will be barred from
making government-guaranteed loans. The remaining 20% of the market
that is now completely private will likely shrink further as
lenders try to comply with regulations Congress created last year.
Starting next summer, taxpayers will have to put up roughly $100
billion per year to lend to students.
The private student loan market has been around for decades, so a
natural question is how did it come to this? According to the
Journal's editorial:
For decades, loans carrying a federal guarantee have been the most
common way of borrowing for college. After raising money in the
private capital markets, lenders made the loans, paying a fee to
the government for each one. The government covered most of the
cost of defaults while allowing the private lenders to make a
regulated return.
The system broke down after Congress in 2007 legislated a return so
low that no private lenders could make money holding these assets.
To keep the money flowing to student borrowers, the government
began buying the loans from private originators last year. But this
larger federal role was intended to be temporary, with an
expiration date next summer. The news from Washington now is that
rather than scaling back federal involvement, the pols want the
U.S. Department of Education to be the exclusive banker to
America's college students.
Again according to the Journal editorial, the problem of having the
government become the direct lender is that student default rates go
up drastically - even though under current law, student loans are not,
for example, generally dischargeable in bankruptcy. There are other
questions not addressed in the WSJ editorial - how does the federal
government plan to repackage those loans, and do what with them? If
the credit quality deteriorates, is the federal government on hook not
just for the unpaid student loans but for any losses on downstream
securities based on them?
The government has been claiming lower default rates than private
lenders, but most government loans have been to students at
four-year colleges. The private lenders have serviced a higher
percentage of students at community and two-year colleges, where
defaults are more common regardless of lender. If the feds are now
making and owning all such loans, expect default rates to soar.
When the government hires contractors to collect on its loans, it
pays them for simply calling the borrower, regardless of the
result. Private lenders, on the other hand, make money from a
performing loan and have a greater incentive to do careful
underwriting and aggressive collection. The government will
nonetheless start spending these illusory "savings" immediately,
and this spending is certain to top official estimates.
This has been a topic of discreet discussion at my university, among
senior administrators, and I am 100% certain that is so at most
schools ....
([2]show)
Staunch Obama supporters, pretty much all, these administrators and
university leaders have a strong suspicion that the federal government
direct supplying university tuition funds will be followed by
interventions in university management. Starting with price controls
on tuition - it is not exactly a secret that subsidies aimed to aid
student tuition bills largely wind up in school hands as tuition
increases. Discussion at my university has centered on how to
diversify revenue streams on the assumption that the federal
government will try to control costs at the universities, in part to
make up for losses by defaulting ex-students.
The commonest dream - promoted, in part, by the fact that the next
couple of years are the top of the baby boomlet, and then a long
fall-off in students - is to find students abroad. Asian students,
wealthy enough and eager enough to want to get a US university
credential - that is one much discussed. The university as tourist
industry, or export industry-at-home, however you want to see it. My
law school has been fantastically successful at it, long before other
schools understood the model of foreign LLMs. For that matter, my law
school is almost certainly the only school in the world - heck, in the
United Federation of Planets - that manages, through its summer
program, to make money on human rights. (Yes, you heard that right.
Don't look so shocked - or get any bright ideas - my dean reports that
it is a lot, lot harder than it looks, even when you are in DC.)
Then there are other questions as to whether, over time, a federal
government directly paying the bills for student education might start
intervening not just in cost questions - price controls - but forms of
"educational industrial policy." After all, it happens anyway in lots
of different areas, directly and indirectly through federal funding
for medical schools, or research grants for various areas of science
and technology, and has been a chief characteristic of the large
research university post-WWII. Why not start doing a little social
engineering at the undergraduate level in the social sciences and
humanities? Make some decisions based on the rational criteria of what
jobs are going to be needed - nurses, e.g. - and steer undergrads that
direction not just subsidizing nursing school, but further by, say,
starving the classics or philosophy department? Imagine the
Congressional debate over what to do with the economics department -
or athletics?
If one believes, in other words, that he who pays the piper, etc.,
then one way or another, such a radical shift in funding over the next
decade is likely to have far reaching consequences for university
education. Not all of them necessarily bad, I suppose (and I admit, as
a tenured professor, autonomy is the university is second in my
priorities only to its ability to raise tuition and give me a cut) -
but far reaching in any case.
([3]hide)
References
1.
http://online.wsj.com/article/SB10001424052970203440104574405154157021052.html?mod=loomia&loomia_si=t0:a16:g2:r2:c0.339266:b27668046
2. file://localhost/var/www/powerblogs/volokh/posts/1252775590.html
3. file://localhost/var/www/powerblogs/volokh/posts/1252775590.html
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