The revelation, reported by the news-breaking Higher Ed Watch blog, centers around archaic lender subsidy that promised that taxpayers would provide massive payments to companies including Nebraska-based NelNet and Virginia-based Sallie Mae for participating in a complicated scam, which had them financing loans with a specific type of bond in order to get the government to "subsidize" the lending with a guaranteed interest rate of 9.5%. This "loophole" was written into law when 9.5% was a reasonable interest rate, but was exploited by a group of lenders a decade later when market interest rates were about 3.5%. That guaranteed these lenders massive profits at taxpayer expense.
The subpoena was requested by NelNet, which trying to defend itself in a whistle-blower lawsuit by showing that it acted with the full knowledge and support of the government. Bush Administration officials have previously denied that they were complicit in allowing lenders to exploit this "loophole," but have acknowledged that they were slow to stop it.
However, that subsidy is pocket change in comparison to continuing student lender subsidies that the Obama Administration has been trying to eliminate for the past year. A bill now pending in Congress would eliminate the subsidy, but it has been stalled and continues to draw opposition.
What's it about? Under current law, the federal government provides guarantees that protect student lenders against the risk that graduates will default on their loans, but also provides payments that guarantee the lenders a profit. The latest figures estimate that these subsidies will cost the government some $87 billion over the next 10 years.
The law that created these subsidies was put in place decades ago, long before the federal government got into the lending business. But a little over a decade ago, Uncle Sam started the so-called Direct Loan program, which allows students to get loans directly from the government. Direct loans, administered by the Department of Education, now account for about one-quarter of the federally-guaranteed student loans written each year.
Now that the federal government is capable of handling it's own loans, Obama wants to nudge private lenders out of the subsidized student loan market to get rid of the costly middleman. However, lenders and some members of Congress maintain that the government shouldn't supplant private industry--even if government created that industry with taxpayer dollars. They also argue that eliminating lender subsidies will eliminate "choice," leaving only one lender in the market, i.e. Uncle Sam.
It's worth mentioning that, in this case, "choice" has little to do with the actual product. By and large, the loans being offered, whether through Uncle Sam or private lenders, have the same rates, same terms, identical borrower protections. The only choice is who you'll have answer the phone if you call with a question. Given the complaints about student lenders posted on the web, private lenders are no less likely (and, in some cases, far more likely) to draw borrower ire than the government.
So here's the question: Assuming that we want students to have access to education loans, do you subsidize corporations as a way of making them available, or do you make them available yourself?
If the government gets rid of the middleman, it's ready to shell out billions of dollars in subsidy savings by providing students with more grants, better loans and better repayment terms. If you are a parent with a child in college, this is a pocketbook issue to watch.