Student Loan Debacle

Recently we have been through a complete fiasco in the student loan market. The end result has been the fed allowing banks to use these positions as collateral against repo loans, which basically moves high-risk student loans onto the balance sheet of our central bank. The anti-market SNAFU was, with no surprise, engineered by Capitol Hill democrats. The self-righteous idiocy is pretty appalling in this one:

"Guess who's asking Treasury Secretary Hank Paulson and Federal ReserveChairman Ben Bernanke for a bailout now? Hint: They are members of anexclusive club who bet wrong on the credit markets last fall. No, it'snot a cabal of Wall Streeters, but Democrats in Congress.
We're referring to the "student loan crisis" now appearing in a mediaoutlet near you. In September, Congress vowed to make education moreaffordable by passing the "College Cost Reduction and Access Act." Thelaw reduced the interest rates borrowers pay on federally insuredstudent loans. Backed by the Federal Family Education Loan Program,these loans account for more than 70% of education lending. Taxpayerswill fork over $7 billion by 2012 to pay for the rate cuts.

But Congress didn't stop there. Convinced that the private lenders whomake these loans were reaping too much profit, Congress also cut theyield on each loan. The return on the popular Stafford loan forundergrads was reduced by 70 basis points. For loan consolidations,Congress cut returns by 65 basis points. In a vibrant market, banksmight have absorbed these hits and continued to lend. But thecombination of legislative fiat and fewer investors willing to buyasset-backed securities amid the credit crunch has put the squeeze onlenders.

What's now clear is that Congress didn't merely wring the profits outof student lending. It's blown up the entire student loan market.Market leader Sallie Mae says it now loses money on every new federaleducation loan. Sallie continues to lend in hopes of a change in D.C.,or increased investor demand for securitized loans.

Others can't wait. A third of the nation's top 100 lenders to studentsin 2007 have temporarily suspended new loan originations or exited thebusiness altogether. Citibank subsidiary Student Loan Corporationcited "unprecedented federal legislation" in announcing its recentwithdrawal from much of the market.

Usually, the law of unintended consequences takes so long to revealitself that no one remembers the culprits. But the speed at whichCongress's student lending changes have gone south is raisingpolitical danger for Democrats, if Republicans had the wit to point itout. (They don't; that's why they're Republicans.)

Democrats would thus like to clean up the mess they created beforeMay, when a flood of college-bound seniors will seek loans. But thepols can hardly repeal their autumn blunder mere moments after takingcredit for it. No doubt many of them are still sending outtaxpayer-financed mail bragging of their "achievement."

The result is that the same man who authored last year's bill to cutlenders' returns has crafted a new bill to subsidize those samelenders. Last week the House passed Education and Labor ChairmanGeorge Miller's latest foray into collegiate finance. The bill givesthe Department of Education new authority to purchase loans directlyfrom lenders.

To summarize: Congress mandated a return on student loans that is toolow to attract private capital in the current market. So Congress willnow use your money to create artificial investor demand. Taxpayerswill bear more risk so that Congress can fashion a new business modelto replace the one it just destroyed. The Bush Administration,unwisely but typically, has endorsed this approach.

Oh, there's more. Mr. Miller's allies in the Senate understand thatlegislation moves more slowly on their side of the Capitol. There maybe too little time before the angry phone calls from parents targetthe 202 area code. So the same Senators who gave us the autumnaccident have begun a letter-writing campaign to request that bailoutwe mentioned earlier.

Daniel Akaka, Bob Casey, Tom Carper, Chris Dodd, Tim Johnson, BobMenendez and Jon Tester are desperately seeking a bureaucrat with alarge checkbook to rescue them from their self-made politicaldisaster. Last Thursday they wrote Mr. Bernanke asking him to acceptstudent loans as collateral under the Fed's new Term SecuritiesLending Facility. They sent a similar letter to Treasury SecretaryPaulson asking him to order the Federal Financing Bank to buystudent-loan-backed securities.

So having raised solemn alarms when the Fed began to accept dodgymortgage-backed securities as collateral, the Senators are nowdemanding that the Fed accept dodgy student-loan paper too. TheSenators helpfully note in their letter that a virtue of theirproposals is that they can be implemented quickly. Indeed, November isjust around the corner.

Needless to say, none of this legislative history is appearing in themultiple media sob stories about students who can't get loans. Butlike airline passengers stranded this month due to panickyinspections, the current student loan "crisis" didn't have to happen.It is entirely a product of Congress."

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