Regulation merry-go-round hits student loans

hollyjfox — Thu, 31 Jul 2008 21:36:10 +0000

There’s been a lot of talk lately about the heavy hand the government has taken in response to the bursting housing bubble and the credit crunch. Two weeks ago, in an opinion piece about the bailout of U.S. mortgage giants Freddie Mac and Fannie Mae, the Economist wrote “At Fannie and Freddie-and, shockingly, at the investment banks-the profits were privatised, but the risks were socialised.”

Never a fan of these sorts of pseudo-private enterprises, The Economist actually calls for their nationalization:

In the past, we have argued for privatising Fannie and Freddie completely. But now that the guarantee is explicit, Mr Paulson should seek to secure the gains for taxpayers and treat Fannie and Freddie like one of their own mortgages, by nationalising them, breaking them up and selling them on.

And last week, the Wall Street Journal ($) ran a lengthy piece describing how the credit crunch is leading to the dismantling of the privatization efforts begun under President Ronald Reagan nearly 30 years ago, including the increasingly maligned student loan industry.

Like Fannie and Freddie, second-cousin Sallie Mae, and many other banks, happily straddled the public/private divide during the liquid good times of the past decade or more, receiving generous subsidies to provide federally guaranteed student loans at fixed interest rates. Now that many banks are dropping out of the Federal Family Education Loan Program (FFELP), or choosing only to lend to the most profitable students, legislators are seeking to keep the banks in line and on board.

Ensuring Continued Access to Student Loans Act of 2008: signed into law May 7
Emergency Student Loan Market Liquidity Act: introduced by Senator John Kerry (D-Mass.) and Paul Kanjorski (D-Pa.), referred to the Committee on Banking, Housing, and Urban Affairs
Preventing Student Loan Discrimination Act: introduced by Senator Patty Murray (D-Wash.) and Chris Dodd (D-Conn.), referred to the Committee on Health, Education, Labor, and Pensions

However, many schools, such as Chicago’s Roosevelt University and Robert Morris College are switching or at least adding the Direct Lending Program, which bypasses the banks and the market altogether.

And if a certain junior senator from Illinois finds himself in the White House next January, the business of student loans could get a whole lot less private. Presumptive Democratic presidential nominee Barack Obama has called for the elimination of FFELP altogether.

Like owning a home, the idea that anyone who works hard enough should be able to afford to be educated at any of our country’s quality universities is an intrinsic part of the American Dream. If Freddie or Fannie were to fail, the consequences to our economy would be significant. A student loan crunch is economically less painful, yet the idea that young people might be denied education due to cost is something that makes many Americans and legislators uncomfortable.

Medill Money Mavens » deregulation

Regulation merry-go-round hits student loans