Stick with Sallie Mae

The U.S. House is expected to vote on the Student Aid and Fiscal Responsibility Act (H.R. 3221), a bill that would replace federally subsidized college student loans with direct federal lending. The Obama administration believes cutting out the private middlemen will reap a whirlwind of savings for taxpayers.

However, those anticipated savings increasingly look overblown. In addition, if Uncle Sam becomes the sole originator of federal student loans, it will displace the largest private originator of federally insured student loans, Sallie Mae. If that happens, Sallie likely won't have much use for its regional servicing center in Lynn Haven that employs 700 people.

That's why we urge Rep. Allen Boyd and his colleagues to vote against this legislation.

In a Sept. 9 letter to Rep. John Kline, R-Minn., the ranking Republican on the Committee on Education and Labor, Douglas Elmendorf, director of the nonpartisan Congressional Budget Office, revised his agency's estimates of the fiscal impact of H.R. 3221. Although House rules allow the bill's sponsors to use more favorable savings estimates from March, the CBO in late August changed its calculation formula and got significantly different numbers. Under the new scoring, spending on direct federal lending would cost $11.4 billion more than previously thought.

Given the consistent history of government vastly underestimating the cost of its programs, even the latest, inflated CBO figure would seem conservative. When Washington has a monopoly on student loans, what's going to prevent lawmakers from using tax dollars to curry favor with families and reward colleges and universities with more subsidized students? The pressure to expand the program will be enormous.

It's also worth considering that private lenders dedicate a chunk of their administrative costs to customer service.

Indeed, if you talk to local Sallie Mae representatives their biggest selling point is how closely they work with students and families to ensure they get the right kind of loan and are satisfied with the process, from the beginning of school to the end. However, like any monopoly the feds will have little incentive to keep customers happy — Americans will just have to accept what they're given. Are they willing to make that sacrifice to save a few dollars?

In 1993, Washington created the Federal Direct Loan Program (FDLP) to compete with private lenders. On the program's fifth anniversary, an Education Department official declared that private lenders "have responded to the Direct Loan Program by improving their service. ... Students and schools are served by healthy competition in student loan programs, which has created marketplace incentives for both programs to improve."

So if this setup has worked so well, why does Washington want to end it? Perhaps because it worked too well: Although the FDLP initially grabbed 34 percent of the student-loan market, in the decade since its share has declined to about 25 percent.

We're under no illusion that the heavily subsidized private student loan market is anything close to "free." We would prefer less government influence and even more competition. But for now, we'll settle for the imperfect status quo (which saves 700 local jobs) rather than a further expansion of government that isn't necessary. The House should kill H.R. 3221.

REPRINTED FROM THE PANAMA CITY NEWS HERALD.

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