A Quick History Lesson

In an interview with the Wall Street Journal's editorial board, would-be commerce secretary Senator Judd Gregg evokes a revisionist history of the FFEL (private lenders) vs Direct Loans (government as lender) debate as evidence of Democrats' intentions to move to a single-payer, government-based health care system. I can't comment on Democrats' future plans for health care, but his comments on the history of student loans require some correcting.

From the article:

...Mr. Gregg argues that he has history on his side. The Democrats, he says, pulled the same public-private switcheroo before with student loans for college. Back in the late 1990s, "there was a huge debate in the committee . . . between myself and [Senator Ted] Kennedy over a private plan versus a public plan." In the end, they compromised -- the government would offer loans directly to students, but that program would have to compete with private-sector lenders. "And the agreement was very formal, and the record shows this very clearly. We agreed to level the playing field, put both plans on the playing field at an equal status and see who won. Well, private plans won. Big time."

Given the choice, most borrowers went to the private sector for their loans. But the Democrats who wanted to nationalize the student-loan market did not take defeat in the marketplace gracefully. "They didn't like that," Mr. Gregg says. "So ever since then they've tilted the playing field back and now they're going to wipe out the private plans in their budget."

Given the current situation of private lenders, it's hard to say that they won "big time"in the competition with the Direct Loan program. But, even more important to correct, is the allusion that all private lenders wanted to do was compete in a true marketplace until the Democrats came along and tilted the playing field. From the beginning, private lenders sought to limit the impact of Direct Lending through legislation. Private lenders got a legislated cap on the market share of the direct loan program for its first five years, ensuring that they wouldn't be out-competed entirely. And lenders sued when the federal government tried to lower fees in the Direct Loan program to compete with private lenders, saying that the Department of Education did not have the authority to make those changes.

And early evidence indicated that private lenders were not competing successfully with the Direct Loan program - in its first years, Direct Loans grew to a third of the student loan market. But that market share dropped as lenders competed aggressively (sometimes too aggressively) for schools' student loan business. Contrary to Senator Gregg's comment that borrowers went to the private sector, students rarely get to choose between the Direct Loan program and private lenders - schools make that decision and offer students one or the other. Lenders know this, and targeted heavy marketing to financial aid offices. This New York Times article from 2007 sums up the history of competition between private lenders and the federal government pretty well.