Sallie Mae Thinks $17 Billion a Year in Giveaways to Banks is a Good Job-Creation Program

As I’ve had occasion to mention in the past, many legislators, including Representative Buck McKeon (R-CA) and Senator Judd Gregg (R-NH) have developed the curious notion that the essence of the free market is wasteful crony capitalist giveaways to private sector student lenders. That’s why they’re opposing an Obama administration initiative to end subsidies to private lenders and just lend the money directly, instead.

Today’s New York Times has an article on the lobbying frenzy that’s under way as private lenders try to keep their ill-gotten gains. It seems that Sallie Mae has put forth a compromise position that they say would achieve 82 percent of the cost savings of Obama’s plan. Sallie Mae’s estimates seem likely to prove unduly favorable to Sallie Mae, but even if the estimates are accurate we’re still talking about $17 billion in pure waste. The Times writes that “Lenders are also emphasizing the jobs they provide.” And, indeed, it would be remarkable if that $17 billion wasn’t employing anyone. But if you gave it to students, it could send an extra 500,000 kids to college for free each year and that would create jobs as well.

in addition to jobs, the waste is also suppose to produce valuable competition. But the direct lending program already contains competition for the contracts to administer the program. The competition the private lenders engage in is competition for the favor of college financial aid offices, a form of competition that fails to produce cost-savings—Sallie Mae concedes that even under their compromise there’ll still be billions in waste—but does produce lots of scandals:

When we discovered that several financial aid directors at major universities and a Department of Education official owned and sold a significant amount of student loan company stock, we became suspicious. Our subsequent investigation and those of others revealed a series of payoffs, kickbacks, and luxury gifts to aid officials, thus compromising college-student relationships. Supposedly impartial intermediaries in the federal financial aid system were operating with substantial personal conflicts of interest.

This page contains information about our investigation and the fallout in the financial aid world, including 10 firings and resignations, hundreds of settlements with state Attorney Generals, and new federal legislation.

Meanwhile, when Republicans were in charge neither they nor the private lenders showed much interest in competition. Rather, like all businesses everywhere they were trying to eliminate the competition by getting congress to undermine or eliminate the cheaper, more efficient direct loan program. Now the administration is, sensibly, trying to do the reverse. Unfortunately, in addition to its friends in the GOP, private student lenders seem to be an important force in Nebraska, home of oft-wavering Senator Ben Nelson, and Sallie Mae is staffing up with Democratic lobbyists and “has hired two prominent lobbyists, Tony Podesta, whose brother, John, led the Obama transition, and Jamie S. Gorelick, a former deputy attorney general in the Clinton administration.”