Student Lenders Scramble to Save Their Sweet Deal

For years leading up to the financial crisis, banks made good money by lending to homebuyers who couldn’t afford to pay. They did so by placing the loans, collecting origination fees and then selling the shaky mortgages to institutional investors who lapped them up in a frenzy of irrationality and greed.

That racket has pretty much dried up as institutional investors have become pickier about the loans they buy. But for lenders, there still is at least one gravy train of easy money at no risk: student lending.

Under a federal program run by banks, Washington buys or guarantees student loans. From the government’s perspective, this is a social compact to help promote higher education and a more skilled workforce. From the banks’ perspective, it’s a sweet deal. They make money off the interest and fees without having to worry about defaults.

So when President Obama proposed ending this scandal-plagued program, at a savings of $87 billion over 10 years, the banking community was taken aback. It had been harvesting billions from taxpayers. And now a president was saying the gig was up.

Obama’s plan is to ax the private loans and replace them by expanding an existing program of direct government loans, one that already makes up 37% of the student loan market. The reasoning is that if taxpayers bear the risks, they should reap the rewards.

Cutting out the middleman makes a lot of sense. But after months of lobbying and contributing to congressional campaigns, banks are close to blocking or greatly watering down the proposal. According to the non-partisan Center for Responsive Politics, the largest student lender, Virginia-based Sallie Mae, spent about $3.5 million on lobbying last year. It has hired a number of leading Democratic lobbyists, including Tony Podesta, brother of Obama’s transition chief John Podesta, to make sure the Obama plan, which has passed in the House, dies in the Senate.

The opponents’ argument is a familiar one: When government tries to be prudent with taxpayer money by driving a hard bargain or eliminating waste, it is actually being anti-business.
This line has been sold repeatedly in the halls of Congress. In the health care arena, it means that Medicare is barred from bargaining with drug companies, even though it is by far their biggest customer and is spending taxpayers’ money. In high finance, prudent action to limit the risks by megabanks is spun by Wall Street as Big Government regulation.

In the case of student lending, banks have at least tacitly acknowledged that the money they’ve made off education loans has been excessive. Many of them are backing a counterproposal, circulated by Sen. Robert Casey, D-Pa., that would maintain their role as the originators and servicers of student loans (using taxpayer capital) while setting their compensation levels well below where they have been.

This idea has two problems. The banks’ compensation would be a political decision that future politicians could be persuaded to increase. And the measure would maintain the sometimes unhealthy relationship banks have with colleges, where financial aid officials have been wined and dined, and sometimes bribed, by banks angling to be chosen as a school’s "preferred lender."

Student lending is small compared with health care or global finance. But even in Washington, $87 billion is still a lot of money that could be put to far better use.


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