Obama and Dems Put a Stop to the Republicans' Kickback Cash Cow in the College Loan Industry

Photo: Photos8.com, Flickr Creative Commons

Photo Credit: Flickr Creative Commons

Reining in insurers and expanding health coverage for Americans aren't the only reforms achieved last week by the White House and Congress. The passage of the health care bill also accomplishes a much-needed if less-noticed goal that, like health care, was last seriously pursued during the early days of grunge rock: The termination of federal subsidies to the scandal-plagued private student loan industry.

Within the pages of the Health Care and Education Reconciliation Act of 2010 is a section that, at long last, stops private lenders from profiting off federally subsidized student loan programs. This means an end to nearly four decades of corporate welfare for the government-created -- but now fully privatized -- icon of the industry, Sallie Mae. The savings to be had from terminating this subsidy -- estimated at between $60 and $70 billion over the next decade -- will go toward shoring up the Pell Grant program (which helps low-income Americans attend college), health care programs and deficit reduction. Where the Department of Ed has long paid private loan companies like Sallie Mae and Citigroup to issue and manage government-backed student loans, the department will now make all federal loans directly, without the help of a middleman, through its own Direct Loan program.

Private lenders, meanwhile, will bid for contracts to service, not originate, these loans.

The change is a major setback for a student loan industry grown fat and arrogant, which for decades has racked up huge profits by making government-backed, risk-free loans to students. Since 1965, these taxpayer-subsidized loans came with a double-guarantee: first against default, and another providing a floor on the rate of return. Taxpayers not only guaranteed high interest rates for lenders, they also protected the banks against any losses. The subsidies are a big part of the reason why Sallie Mae CEO Albert Lord was recently able to build a private 18-hole golf course on his 225-acre estate near his company's headquarters in Reston, Virginia.

Starting in July, those loans will be Sallie Mae's to lend no more. In acronymic language almost every college grad under the age of 50 can understand, the famous FFEL is dead.

To grasp why Obama's termination of the FFEL deserves a loud cheer, it helps to call Sallie Mae by its real name. Sallie Mae and Nellie Mae, its sister company, sound like kindly maternal aunts, the sort who not only provide money for college at stable interest rates, but might also bring out a warm plate of raisin cookies to munch on while you fill out the forms. In reality, Sallie and Nellie are cutesy public relations masks for the SLM Corporation, a publicly traded billion-dollar company that long ago lost any resemblance to the public-minded "government-sponsored enterprise" launched by Congress in 1972 to encourage wider involvement in government loan programs created by the Higher Education Act of 1965.

Within a decade of being launched with the mission to help kids afford college, executives at Sallie Mae grew bored. To expand their operations (and increase profits) they began courting Wall Street in the late 1970s. Wall Street was an eager suitor in return, anxious to get in on the endless flow of government-guaranteed action. It seemed too good to be true: Sallie Mae was congressionally chartered and had the promise of the U.S. Treasury behind 97.5 percent of every FFEL loan it originated and serviced. Along with other major lenders that entered the game during the 1970s and '80s, Sallie Mae's profits swelled on the back of a booming student loan market racing to keep pace with the upward spiral of tuition costs.

By the time Bill Clinton entered the White House in 1993, there were growing rumblings -- by both Democrats and fiscally conservative Republicans -- over this taxpayer-sponsored boomlet. During his first year in power, Clinton announced plans to stop funding what had become an anachronistic cash cow for private lenders. The Department of Education, after all, could save a lot of money by issuing the loans directly, and then use the benefits to help educate more Americans at lower cost -- which was the whole point of the program to begin with. Building on plans hatched by deficit hawks in the George H.W. Bush administration, Clinton created the Direct Loan program and set a timetable to gradually phase out the FFEL program.