What Do Freddie & Fannie Have that Sallie Doesn’t?


The same thing that a public option in health insurance would have: the ability to run off the competition.

Yesterday, you may have heard, the House voted to cut off funding for Acorn, with all of the opposition coming from 75 Democrats.  Typically, the minority – the Republicans, for the moment – will try to tack something truly poisonous to the majority on a bill that the majority – for the moment, the Democrats – just can’t refuse.

In this case, it was the final gasp knee on the ventilator tube of the independent student loan market.  The story combines the worst elements of the government part of the mortgage mess with the scariest elements of the proposed insurance mess.  Way back, bankers and independent lenders didn’t see students as such good credit risks.  (They still don’t, which is why they tend to loan to them at 18% interest on credit cards.)  So the government decided to step in and offer subsidized loans for education.  Over time, the banks who made the federal money available were subject to more and more restrictions, until they became, to all intents and purposes, a utility of the federal government when it came to student loans.  So much so that they could be portrayed – sadly, with some justification – as rent-seekers offering no value added:

“This bill will end the billions upon billions of dollars in unwarranted subsidies that we hand out to banks and financial institutions, and will use that money to guarantee access to low-cost loans,” Obama said in a statement.

The unwarranted subsidies to bad credit risks and liberal universities naturally go unmentioned, those being virtuous in nature.

Now, in a student-loan version of the Community Reinvestment Act, the government will spread that virtue around:

The Obama administration would use anticipated savings from the measure to increase grants for low-income students, boost funding for minority student groups, provide money for school construction, with a small portion left over to pay down the deficit.

The news has driven Sallie Mae’s credit rating down to a BBB-, and its stock price down accordingly.  This is exactly the path that a public option in health insurance would take.  The public (heh) has roundly rejected that idea as pretty terrible.  It was terrible with mortgages (85% of which are now backed by the government), it would be terrible in health insurance.  Why is it any better with student loan debt, which is also some of the worst debt in the world to owe?

I understand the Republicans’ desire to get the Democrats to vote on ACORN.  With any bills likely to be bottled up in committee forever, a floor amendment to one of the few bills the Democrats were permitted amendment to was the logical path to take.  Ironically, it may also focus attention on just how bad a bill that is.