Obama’s Student Loan Budget Plan

Following on from my previous post about the Student Loan Corporation email I got this morning, it looks like the plan President Obama is proposing is basically to eliminate a subsidy system for private loan corporations that the government has been running for the last fifty years. This WaPo op-ed does a great job of laying out the history.

In short, the government has been insuring low-interest student loans for all this time by basically guaranteeing profits for private banks like Citi Corp who give out those loans. Its a classic Frankenstein Washington program where those who insist on free market rules and those who insist on government assistance get together and insure that neither happens. The Obama plan eliminates the cost of maintaining this facade by letting the Department of Education provide the loans through Treasury.

How much will tax payers save because of this new plan, if adopted? Estimates put that number between $40 and $100 billion annually.

Citi’s email is, typically, effusive with unsupported “facts” about how this will negatively impact both the government’s bottom line and consumers. The claim that this new plan will increase the federal deficit “substantially” is unsubstantiated as yet: there’s no concrete plan that I can find on how the loans will be doled out. Logically, if we can afford multi-trillion dollar bailouts to banks like Citi, I’m sure we can handle a few student loans. The word “substantial” is subjective and relative. Meanwhile as a matter of bookkeeping, since student loans can last for decades without defaulting, they are a relatively stable investment. At the risk of recalling the Subprime problem, student loans can be handled as assets, not debts.

Their claim that this is an anti-choice plan presupposes that those of us who go to college are really in control of where we get loans from. In reality, the student loan game is a rigged one, just like health care. The word “choice” is a double entendre: it sounds like the choice is yours, but the choice is really made by corporations and large institutions – colleges or hospitals, depending on the example.

Citi lists a number of advantages of student loans that it claims are the result of competition, such as default prevention services, education and web access. It is debatable whether web access is an advantage or an inevitability, but default protection and education will surely both continue under the new plan. The problem with this entire line of argument, though, is that if there’s no risk then there’s no real competition. The current system is not a free market system and so the entire argument breaks down right there.


Citi Group’s Email to It’s Student Loan Customers

I just got this message from the Student Loan Corporation, a division of Citi Corp. At the moment, I have no information one way or the other on the proposed budget changes that Citi is talking about here, but it reads like typical corporate anti-government crap. I’ll look into it some more and let you know:

May 7, 2009


Thank you for the opportunity to help you obtain the education of your choice. As a student loan provider for the past 50 years, Citi has provided financial aid assistance to millions of students and parents nationwide.

Given the challenging economy and continued increases in the cost of higher education, it is critical that the U.S. student lending system serves the best interests of students and their families. If you believe that competition and choice among student loan providers is valuable, you have an opportunity to make your voice heard.

Why Get Involved?
The government budget outline proposes offering federal student loans solely through the federal government’s Direct Lending Program starting July of next year. While this proposal will not impact a borrower’s ability to obtain a federal student loan, it will eliminate your ability to choose a student loan provider. It will also substantially increase the national debt since each and every federally-insured student loan will be funded by the Federal Treasury through the issuance of treasury securities. This proposal impacts you as a citizen – both as a taxpayer and as a borrower.

Why Does Competition And Choice Matter?
Without private lender involvement through the Federal Family Education Loan Program, students and their families will not enjoy the benefits that competition has made possible for more than 40 years. This competition has provided not only a choice of lenders, but also innovative products and services, such as:

* a variety of borrower benefits that lower your cost of borrowing
* financial literacy programs that educate you on how to borrow responsibly
* web-based tools and resources to advise you about your financing options
* default prevention services to help you pay back your loans

Competition also has driven increased customer satisfaction as a result of the responsiveness, personal attention and on-campus support that student loan lenders have provided to borrowers and schools nationwide.

Make Your Voice Heard
If you value the ability to shop for, evaluate and choose your student loan provider, make your voice heard by contacting your Members of Congress and by signing one of the online petitions that support borrower choice and competition in federal student lending.


The Student Loan Corporation