Uwe E. Reinhardt:
I recently testified at a House Ways and Means Committee hearing on the role of a new public health insurance plan in a reformed American health system. During the hearing, Charles W. Boustany Jr., a Republican congressman from Louisiana, asked a fellow panelist whether it was proper for government to compete head-on with private enterprise. It was a fair and thought-provoking question.
To formulate an answer, one may consider the current debate over the fate of the federal student loan program, which President Obama seeks to reform drastically.
The federal government currently provides loans to college and graduate students through two channels.
The first is the Federal Family Education Loan (F.F.E.L.) program, established in 1965. That program relies on an array of private lenders, including small and large banks, such as Citigroup and Bank of America, and Sallie Mae, formally known as the SML Corporation, to make the loans and finance them from private sources.
These private lenders receive an interest subsidy from the government, along with federal loan guarantees that cover close to 100 percent of the loans these lenders made to students. In other words, to these lenders it has been a profitable, virtually risk-free business. Currently that channel accounts for roughly 75 percent of the annual total of about $90 billion in student loans.
The second channel, known as the Federal Direct Loan Program (F.D.L.P.), was created by the Clinton administration under the Omnibus Budget Reconciliation Act of 1993. Under that program, the government lends students money directly through the Department of Education. These loans now cover about 25 percent of all federal student loans. They are financed with United States Treasury funds.
An analysis performed by the George H.W. Bush administration in 1990 had shown that the direct loans were less costly to taxpayers than the F.F.E.L. loans. Even so, on the notion that the government simply should not compete with private enterprise, the Republicans in Congress in 1994 took aim at the direct loan program under their Contract With America platform. In the end, however, Congress did not eliminate the F.D.L.P.
In the meantime, studies by the Congressional Budget Office have shown that the direct loan channel is significantly cheaper for taxpayers than the private-lender route. In its March 2009 Preliminary Analysis of the President’s Budget, for example, the budget office estimates that elimination of the private-loan channel (the F.F.E.L.) would yield the government budget savings of $94 billion over the next decade, about twice the estimate President Obama’s own Office of Management and Budget had included in the president’s budget.
Spurred on by these estimates, President Obama has proposed to eliminate the private-sector F.F.E.L. program altogether and to use the expected budget savings for granting more student loans and more Pell Grants (scholarships) to low-income students. Private lenders would no longer profit from this (for them) riskless business, but merely administer the Federal Direct Loan Program under competitively bid federal contracts.
As would be expected, the private lenders who have hitherto profited from the F.F.E.L. program vehemently oppose the president’s proposal. They cite potential job losses in their industry and argue that students and colleges would lose “valuable services” that they say private lenders provide in addition to the loans.
The industry has powerful allies among in Congress, not only among Republicans who may feel that government simply has no business competing with private enterprise, but also among Democratic members of Congress, including the Senate Budget Committee chairman, Kent Conrad, and the House Appropriations Committee chairman, David Obey.
The options before Congress seem clear. For the same burden on American taxpayers or on the federal deficit, Congress could either
(A) provide more loans and scholarships to students by eliminating the more expensive F.F.E.L. program, or
(B) provide fewer loans and scholarships to students, but continue what really amounts to an income-maintenance program shoring up employment and profits for private lenders — an income-maintenance program to which these private lenders somehow feel entitled.
One must wonder how the representative American taxpayer would choose between these two options. That choice would provide clues to the answer they would have given to the lawmaker on the House Ways and Means Committee during the hearings on the public health insurance plan.
Sometime during the late summer we shall witness a High Noon moment on the issue of student loans. Who goes down in the shootout — the president or the private loan industry — may be an augury for the many shootouts yet to come in health reform.
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