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Monday, August 06, 2007

James Surowiecki: Rent-Seekers

James Surowiecki of The New Yorker wonders why we have a corrupt student-loan program where "it’s four times as expensive for the government to subsidize and guarantee private loans as for it to issue those loans itself":

Rent-Seekers, by James Surowiecki, The New Yorker: ...[T]his spring, ... news broke that student-loan companies had been using unsavory and possibly illegal tactics to get preferential treatment from university financial-aid officers. ... In response, the Senate passed a bill toughening rules against “inducements” from lenders to administrators. All well and good, but it leaves untouched a more fundamental scandal: the huge profits that lenders make from student loans are being earned on the government’s dime. ...

We want college students to be able to finance their education at reasonable rates. But banks are understandably leery of lending to people with no collateral and uncertain future earnings. So we provide incentives to lend. The federal government, for instance, guarantees the so-called Stafford loans... On top of that, the government hands out billions of dollars in subsidies to lenders every year... In effect, lenders get a guaranteed return with very little risk.

This convoluted process is good at making student-loan companies rich... But it’s not very good at getting government money to students cheaply and efficiently. President Bush’s 2007 budget shows, for instance, that it’s four times as expensive for the government to subsidize and guarantee private loans as for it to issue those loans itself. In other words, the current system is not just corrupt. It’s also inefficient. So why are we stuck with it?

In part, it’s ideology, and the dominance of what you might call the privatization mystique—the idea that anything the government can do, the private sector can do better. Often, this makes sense... But the student-loan market isn’t a free market ... because the government effectively determines prices, insures against losses, and subsidizes volume. In this environment, most of the competition among private companies is really just squabbling over how to split up the spoils. Economists call this behavior ... “rent-seeking.” It’s common in areas where the fetish for privatization has taken hold, such as the outsourcing of homeland security to private contractors...

More than just ideology, though, has kept student-loan companies in their lucrative niche. Economic power has also had something to do with it. Since the mid-nineteen-nineties, the federal government has offered direct student loans, making it unnecessary for students to go through private lenders. The loans are significantly cheaper for the government, but ... private lenders have done all they could to limit its reach. ...

What’s to be done? The continuing repercussions from this spring’s scandal, and the election of a Democratic Congress, have been having an effect: Congress will shortly pass legislation that, among other things, would slash the subsidies for private lenders... But truly revamping the student-loan program will require renewed confidence in the ability of government programs to serve individuals. ... Talk of the government running anything ... makes people anxious, conjuring up images of state-run steel factories, but the truth is that the government is already running the student-loan market. The problem is that up to now it’s been run in the interests of student-loan companies. Maybe it’s time to start running it in the interests of students.

    Posted by on Monday, August 6, 2007 at 12:15 AM Permalink  TrackBack (0)  Comments (7)


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