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These Socialists Want to Save You Money

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by Brien Jackson

It’s worth keeping in mind that, when you hear a Congressional Republican railing against socialism or declaring something a dangerous threat to capitalism, it’s very likely that by “capitalism,” they really mean “free government money for large corporations.” Consider, for example, this situation, in which the Seattle public transit system is no longer allowed to provide shuttle service from park and rides to the stadium for Seattle Mariners games because a private firm put in a bid to provide the service…for three times the cost. Why is the vastly more expensive option being undertaken? Because the Bush administration wrote a regulation prohibiting public entities from providing services in the event a private firm is willing to provide them, irregardless of costs. The CEO of the company in question asserted that the policy “saves taxpayers money,” but it’s not exactly clear how. Previously, the cost of operating the shuttles was offset by a rider’s fee of $3, and a reimbursement from the Mariners for the rest. Presumably the new arrangement will be similarly funded, it will just cost 3 times as much for the Mariners and their customers. Also, the University of Washington, a taxpayer funded institution, finds themselves in a similar circumstance.

But that’s not nearly as pernicious as the gnashing of teeth over President Obama’s budget proposal to eliminate government guarantees of private student loans in favor of direct loans to the same, which has reached near apoplectic heights. For those not familiar with the program and the proposal, Jon Chait explains it quite well:

For many years, the federal government supported college education by guaranteeing bank loans to students. If a student defaulted on his loan, Washington would simply pay back the difference. In 1993, Clinton undertook to reform the program by cutting out the middlemen and simply having the federal government issue the loans directly. Clinton hoped to save money for the government and plow some of those savings into lower interest rates for students. Of course, private lenders who benefitted from the no-risk profit stream balked and forced a compromise whereby both kinds of loans–guaranteed private loans, and direct loans from the government–would exist side by side.

Recent years have shown beyond a doubt that the direct lending program works better. Every independent analysis–by the Congressional Budget Office, by the Office of Management and Budget under each of the last three presidents, and by the New America Foundation–has found that direct lending is cheaper. The guaranteed-loan program managed to cling to life through its congressional patrons and through simple graft. In 2007, a major student-loan scandal emerged when it turned out that private lenders paid off college administrators to drop out of the direct lending program and steer students to them.

In other words, the government currently guarantees the student loans private banks make, essentially eliminating all the risk from said loans. If they didn’t, many, many fewer banks, if any at all, would provide loans for tens of thousands of dollars to 18-20 year olds to go to college, which would mean a college education would be harder, if not impossible, for most people to attain. The government also has a smaller program that directly provides loans to students, and this program is dramatically cheaper than the guarantee program. Which makes sense; by funneling money through private banks, the government is being left on the tab for various fees and penalties accrued, driving up the bill. By simply making the loans directly, the government can save something in the area of $5 billion annually. But Republicans, notably Sen. Judd Gregg (R-NH), don’t particularly care for this, and neither do banks, as you’d expect. And guess what, they’re tossing around the specter of socialism to make their case:

“The administration has decided that it wants to capture the profits of federal student loans,” said Kevin Bruns, executive director of America’s Student Loan Providers, a trade group that is fighting Mr. Obama’s plan.

Sounds awful. But then, those “profits” Mr. Bruns is referring to are nothing but unnecessary costs that taxpayers cover and which could be eliminated by simply moving the program entirely to direct loans. But that would, admittedly, be bad for the bottom line of the banks who handle the loan programs. The question then, basically, comes down to whether you think $5 billion in taxpayer money is best spent on an unnecessary transfer from the public coffers to a few large banks, or whether there’s a better use of for that money. But this is crony capitalism at its finest; fleece the taxpayers for money allocated inefficiently, and then deride anyone who wants to eliminate the waste as anti-capitalist.


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