OUCH!: Big Banks on Campus

Off to college? Or just wondering how you're going to pay for your kid's degree? Time for a quick lesson on how the banking industry's hefty campaign contributions have distorted the marketplace for student loans.

Everyone knows how valuable a college education is. However, as the importance of a bachelors degree has increased, the ability of families to pay for it has decreased. Since 1980, the average tuition at four-year colleges has doubled, after adjusting for inflation. Median income for families, however, has not kept pace, increasing just 12 percent over the same period.

Ironically, as taxpayers, we all subsidize the private student loan industry, through federal guarantees of loans and other financial perks to encourage banks to loan students money. It's a cushy deal for the banks -- there is no risk for them, thanks to Uncle Sam. But banks hate that the government dictates the terms of these loans. There is also a separate direct lending program, where students can borrow from the government, which the banks hate even more, claiming it cuts into their business. (See also Keeping Students' Interest: Money in politics can make your student loans cost more).

In July 1998, when Congress debated the student loan program as part of the Higher Education Amendments of 1998, Sen. Tom Harkin (D-Iowa) made a modest proposal. Why not cut, by 25 percent, the origination and insurance fees students pay to secure their loans? The cut would save students about $170 each, which the senator pointed out could buy a lot of books.

The Senate, however, rejected Harkin's amendment, by a vote of 56 to 41, mostly on party lines. That did not stop Congress from approving, however, at least $1 billion over five years in additional taxpayer subsidies for banks. The new subsidies came to assure banks that the cost of new, lower interest rates approved as part of the bill would not come out of their pockets.

Fast forward to the fall of 1999. This time, the student loan industry decided that it was tired of interest rates being linked to government securities. Another lobbying campaign on Capitol Hill won the banks what they wanted - to link loans to commercial interest rates instead. The U.S. Department of Education estimated that the change is worth $1.7 billion in profits and new taxpayer subsidies for lenders, including $692 million for Sallie Mae alone, which controls nearly 40 percent of the market nationally.

For Sallie Mae, that's a return on investment of 123,000 percent! Sallie Mae has given $562,300 to candidates and parties since 1997, 60 percent to Republicans, according to the Center for Responsive Politics. The banking industry as a whole is a routine source of generous campaign contributions - $43.7 million to candidates and parties since 1997 alone, 65 percent to Republicans.

The student loan battles are not over. This year, President Bill Clinton proposed shaving $2.3 billion off of the $6 billion in subsidies the government will pay in the 2001 fiscal year to banks for student loans, an enormous savings for taxpayers. Rep. William Goodling (R-Pa.), chairman of the House Committee on Education and the Workforce, however, declared Clinton's proposal "dead on arrival." He also had plenty to criticize about a more recent Clinton-Gore plan to lower interest rates on direct student loans, which the administration estimates would save students and parents $600 million. Who was his top donor in his last election? USA Group, now owned by Sallie Mae.

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