Loan Wolves

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Conservatives have a theory about Washington scandal, which holds that scandal is a function of Big Government--the more powerful the government, the bigger the temptation to pay it off. The recent wave of GOP scandals, by this theory, was proof that the party had abandoned its small-government faith. "It's no accident," editorialized National Review last year, "that congressional Republicans were cleaner when they were much more serious about limiting government."


It's certainly true, at the extreme, that you can't have government scandal without government. (In the anarchic state of nature, you're more likely to get mauled to death by bears but far less likely to have your tax dollars filched by Duke Cunningham.) But, in the real world, conservative ideology has less to do with the size of government than with the way government operates. And the conservative style, I'd argue, actually makes corruption more likely. As Exhibit A of my indictment, I present the college-loan scandal.


You may have heard about this episode, in which numerous college-loan administrators took kickbacks from lenders. Everybody agrees it's sleazy. What everybody doesn't realize is that it's a direct result of anti-government mania.


When Bill Clinton entered office, he tried to reform the inefficient student-loan program. The system he inherited was this: Students who wanted a college loan would go to a private lender; the lenders, in turn, would get paid a government-set interest rate by Washington; and, if the student defaulted on the loan, Washington would pay it back for them.


Clinton proposed to replace the guaranteed loans with direct loans--which meant having the federal government cut out the middleman and make the loans itself. Every independent agency that has calculated the cost--the Congressional Budget Office, Clinton's Office of Management and Budget, even George W. Bush's Office of Management and Budget--has concluded that direct lending would save the government billions of dollars each year.


Naturally, the middlemen did not take kindly to being cut out of the deal. They launched a fierce counterattack, and they were embraced by conservatives inside Congress and out. Their main line of argument was that direct lending amounted to Big Government. (Or, as Grover Norquist called it, Clinton's "scheme for a government takeover of the student-loan program.") Conservatives forced a compromise that created direct loans but also kept guaranteed loans and let colleges choose which kind to use.


Both sides assumed that the cheaper direct loans would dominate. But a funny thing happened: After an initial burst of popularity, direct loans stagnated, and many colleges began returning to the old guaranteed-loan system. Conservatives held this up as proof of the superior efficiency of the free-enterprise system. As one lobbyist for private lenders jeered in 1997, "Direct lending has just become one lender among thousands, and it is still struggling to be relevant." The gloating continued over most of the next decade. As Stephen Moore, then director of the Free Enterprise Fund, crowed two years ago, "Some five hundred colleges have stopped participating [with direct lending] because of shoddy management and financial losses."


Only it now turns out that the private lenders' success came not through superior efficiency but through superior graft. The emerging college-loan kickback scandal is a vast scheme by private lenders to bribe colleges into foisting their services onto students. Lenders plied college-loan officers with meals, cruises, and other gifts. Some loan officers were given lucrative stock offers. Columbia's director of undergraduate financial aid purchased stock in Student Loan Xpress--which became one of that school's preferred lenders--for $1 per share and sold it two years later for $10 per share. Some lenders offered millions to the universities themselves to drop out of the direct-lending program.


So this whole scandal could have been avoided if Bill Clinton had just gotten his way. (Admittedly, letting Clinton have his way was not, in general, a great way to avoid scandals.) Indeed, the very thing that drove conservatives to oppose Clinton's reform--the vast private profits made available by guaranteed loans--is what enabled the scandal. Almost any government program creates at least some potential for cheating. The hallmark of the conservative approach is that the scale of the profits is so huge. Sallie Mae, the largest student lender, was recently sold for $25 billion.


The conservative approach to health care runs along the same lines. Most conservatives opposed the prescription-drug bill, but they approved of the provisions funneling recipients to private insurers, even though such plans cost around 20 percent more than traditional Medicare. During the Social Security fight last year, the right's main goal was not to cut benefits but to funnel as much of the money as possible into private accounts, where Wall Street could take a healthy piece. Government can easily mail out checks to old people without corruption. Apportioning a $100 billion investment market without corruption would not be nearly so easy.


The latest development in the college-loan scandal is that the U.S. Department of Education didn't notice the massive scandal unfolding under its nose. In fact, one of the key Department officials charged with overseeing student loans, Matteo Fontana, turns out to have owned more than $100,000 in stock in one of the private companies that benefitted from his lax oversight. (It's the ownership society in action!) When Congress held hearings into this fiasco, GOP Representative Ric Keller offered up a novel interpretation: The Department's failure demonstrated that the guaranteed-loan program--where all the corruption had occurred--was superior to direct lending. His logic? Since the Department was so lax in its oversight, said Keller, "Why should we put the federal Department of Education in charge of all student loans?"


I would've thought that the spectacle of GOP hacks allowing business interests to corrupt a conservative-championed privatization program might prove sobering for free-market enthusiasts. But apparently it just proves, once again, that they were right about Big Government all along.


Jonathan Chait is a senior editor of The New Republic.

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