Loan Wolves; Conservative con men corrupt campus.

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Conservatives have a theory about Washington scandal, which holdsthat scandal is a function of Big Government--the more powerful thegovernment, the bigger the temptation to pay it off. The recentwave of GOP scandals, by this theory, was proof that the party hadabandoned its small-government faith. "It's no accident,"editorialized National Review last year, "that congressionalRepublicans were cleaner when they were much more serious aboutlimiting government."

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

You may have heard about this episode, in which numerouscollege-loan administrators took kickbacks from lenders. Everybodyagrees it's sleazy. What everybody doesn't realize is that it's adirect result of anti-government mania.

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

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

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

Both sides assumed that the cheaper direct loans would dominate. Buta funny thing happened: After an initial burst of popularity,direct loans stagnated, and many colleges began returning to theold guaranteed-loan system. Conservatives held this up as proof ofthe superior efficiency of the free- enterprise system. As onelobbyist for private lenders jeered in 1997, "Direct lending hasjust become one lender among thousands, and it is still strugglingto be relevant." The gloating continued over most of the nextdecade. As Stephen Moore, then director of the Free EnterpriseFund, crowed two years ago, "Some five hundred colleges havestopped participating [with direct lending] because of shoddymanagement and financial losses."

Only it now turns out that the private lenders' success came notthrough superior efficiency but through superior graft. Theemerging college-loan kickback scandal is a vast scheme by privatelenders to bribe colleges into foisting their services ontostudents. Lenders plied college-loan officers with meals, cruises,and other gifts. Some loan officers were given lucrative stockoffers. Columbia's director of undergraduate financial aid purchasedstock in Student Loan Xpress--which became one of that school'spreferred lenders--for $1 per share and sold it two years later for$10 per share. Some lenders offered millions to the universitiesthemselves to drop out of the direct- lending program.

So this whole scandal could have been avoided if Bill Clinton hadjust gotten his way. (Admittedly, letting Clinton have his way wasnot, in general, a great way to avoid scandals.) Indeed, the verything that drove conservatives to oppose Clinton's reform--the vastprivate profits made available by guaranteed loans--is what enabledthe scandal. Almost any government program creates at least somepotential for cheating. The hallmark of the conservative approachis that the scale of the profits is so huge. Sallie Mae, thelargest 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 theyapproved of the provisions funneling recipients to privateinsurers, even though such plans cost around 20 percent more thantraditional Medicare. During the Social Security fight last year,the right's main goal was not to cut benefits but to funnel as muchof the money as possible into private accounts, where Wall Streetcould take a healthy piece. Government can easily mail out checks toold people without corruption. Apportioning a $100 billioninvestment 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 unfoldingunder its nose. In fact, one of the key Department officialscharged with overseeing student loans, Matteo Fontana, turns out tohave owned more than $100,000 in stock in one of the privatecompanies that benefitted from his lax oversight. (It's theownership society in action!) When Congress held hearings into thisfiasco, GOP Representative Ric Keller offered up a novelinterpretation: The Department's failure demonstrated that theguaranteed-loan program--where all the corruption had occurred--wassuperior to direct lending. His logic? Since the Department was solax in its oversight, said Keller, "Why should we put the federalDepartment of Education in charge of all student loans?"

I would've thought that the spectacle of GOP hacks allowing businessinterests to corrupt a conservative-championed privatization programmight prove sobering for free-market enthusiasts. But apparently itjust proves, once again, that they were right about Big Governmentall along.

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