Not to smart--Democrats mess up student loan market

Washington Examiner Editorial:

Believing itself infallibly wise, Big Government would rather cover its tracks than admit a blunder. So it was no surprise that Sen. Ted Kennedy of Massachusetts and Rep. George Miller of California, respectively chairmen of the Senate and House committees on education and labor, blithely forced through Congress this week a stopgap solution to the impending student loan crisis without acknowledging that they created the problem in the first place.

Last September, Kennedy and Miller pushed the College Cost Reduction and Access Act through Congress, and President George W. Bush signed it into law. The title sounds good, right? The law squeezed private lenders in the guaranteed student loan program in a number of ways, supposedly to save money for student borrowers and taxpayers alike. Critics warned, however, that the savings would be illusory because private lenders would leave the program if they could no longer make a profit.

And that’s exactly what happened even before the present subprime lending mess caused a credit crunch that turned small profits into potentially serious losses. Eight months after the Kennedy-Miller provisions became law, more than 50 private lenders who comprised 14 percent of the student loan system have stopped making loans to college students. With next year’s freshman class just now seeking loans, the exodus of private lenders is sure to accelerate, leaving hundreds of thousands of students in the lurch.

There is still the Federal Direct Loan program, which uses no private lenders. But it may not have enough staff to handle a big increase in loan applicants. Worse, several studies, including one from the Department of Education, show the program costs taxpayers more than the private-lending-based program — 2.26 cents per dollar loaned versus 1.44 cents per dollar loaned through the subsidized private lenders that Kennedy and Miller hobbled.

To deal with the fleeing private lenders, Kennedy and Miller persuaded Congress to approve their new legislation directing the Education Department to buy a huge volume of existing loans from private lenders, thus providing more capital for the lenders to use for incoming students. In other words, Kennedy and Miller want the department to cover their tracks....

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Democrats are sometimes at war with the market place and this is one such example. If they make it unprofitable to engage in an activity they should expect fewer people to engage in it. For guys who want to control education policy, they are not too smart.