- The Washington Times - Monday, April 27, 2009

ANALYSIS/OPINION:

President Obama is engineering a federal takeover of the college-loan industry. This new entitlement will cost taxpayers billions and never go away.

Mr. Obama’s plan to fully nationalize an already government-dependent sector adds another expensive burden to the already overwhelmed federal budget. It is also likely to result in a loss of tens of thousands of jobs, limit loan options for students and substantially increase the deficit. It’s up to Congress to resist this public-sector capture of private-sector profit and instead embrace less costly reforms.

Lawmakers vote in the coming days on the 2010 budget proposal, which eliminates the federally guaranteed student-loan program, known as the Federal Family Education Loan program (FFEL).

Those loans are replaced with direct government loans from another existing Department of Education loan program, the lesser-used Federal Direct Loan Program (DLP). The supposed savings are used to expand the availability and size of Pell Grants for poor students, making them a mandatory part of the annual budget.

The Office of Management and Budget has promoted the changes by arguing that a consolidated student loan program will be “more efficient and less expensive” while “helping to finance substantially larger Pell Grant scholarships for low-income students.” But claims of efficiency and cost savings ignore the real cost to taxpayers and how public- and private-sector loan competition ensures better performance for consumers.

While Mr. Obama talks about the need to address the ever-burgeoning cost of entitlements, he is really seeking to add another never-ending mandate. Like Social Security and Medicare, the Pell grant proposal requires a minimal level of mandatory spending that increases each year.

The Congressional Budget Office (CBO) estimated in March that consolidating the loan programs will save $94 billion over 10 years. But CBO also found that a Pell entitlement program will boost yearly spending by $293 billion over the same period, wiping out those savings. The administration’s budget also omits the considerable cost of servicing the loans, expected to total hundreds of millions of dollars per year.

Mr. Obama characteristically doesn’t take into account the long-term deficit cost. CBO estimates that the deficit will hit almost $1.7 trillion this year, or 11.9 percent of gross domestic product, and $1.1 trillion in 2010, or 7.9 percent of GDP. This will be the largest deficit as a share of GDP since 1945.

Peter Warren, president of the Education Finance Council, told us the real fiscal impact is simply ignored. “The proposal itself adds to public debt outstanding. That is not a factor that anybody ties to assess the impact. It is just not considered,” said Mr. Warren. His group, which represents nonprofit and state-based student-loan providers opposed to the changes, also estimates 35,000 jobs could be on the chopping block with an additional 50,000 workers adversely affected.

Larger lenders will compete for contracts to service the government loans, but the industry is full of smaller players unable to compete. In an effort to buy off these largely state-level and quasi-government agencies that currently make loans under FFEL, the administration is providing $500 million a year in subsidies to fund financial-literacy programs and other services.

For too long, the government’s aged private student-loan program has socialized losses while companies garnered immense gains. But establishing another bloated entitlement program with taxpayer debt is not the solution. Like much of the spending seen in the $730 billion stimulus package, the loan-program consolidation is another Obama administration policy that America cannot afford.

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