Politics

Loan Shark

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When scandal-plagued Tom DeLay finally gave up his quest to regain the leadership of congressional Republicans, the preternaturally tan Ohio Republican John Boehner sat down and drafted a 37-page political manifesto to win the votes of his colleagues. Boehner, himself long known as a friend to K Street, issued a tempered critique of the Republicans’ sale of indulgences to lobbyists like Jack Abramoff. House Republicans should elect him majority leader, Boehner wrote, because he believes that “[w]e need to constantly earn the trust of our constituents: They need to feel that they can trust us to produce policies that will respond fairly to their needs, respect their values, and offer greater opportunities for reaching their own dreams.”   

The platitudes apparently resonated. Boehner won. But anyone wanting proof that Boehner is no reformer need only look at the changes to federal student-loan programs that he just helped push through Congress as part of this year’s budget reconciliation bill. The alterations reduce government subsidies for student loans by $13 billion over the next five years. One of the key provisions: higher fixed interest rates that will increase the payments of students and their parents by hundreds of dollars a year.

With Boehner’s approval, Congress switched the interest rate on most student loans from a variable one, which this year averaged an attractive 5.3 percent, to a fixed rate of 6.8 percent. The variable rate over the last 14 years has averaged just 6.1 percent. The Congressional Budget Office (CBO) estimates that the variable formula would have generated rates of about 6.4 percent on average in the future. But, thanks to the new fixed rate that takes effect on July 1, a member of the class of 2010 who borrows the typical $17,000 during school will likely have to pay as much as $1,000 more than a student under the old system, according to calculations provided by the American Council on Education (ACE). The rates will jump even more for the increasingly popular federal loans that allow parents to borrow the full cost of their child’s education. The Parent Loan for Undergraduate Students (plus) rate will rise from the current 6.1 percent (and a ten-year average of 6.9 percent) to 8.5 percent in July. That means repaying the typical one-year plus loan of $10,000 taken out this fall will cost up to $1,200 more than repaying one taken out this spring, according to ACE. The Republican leadership, with Boehner serving as point man for the issue, studiously avoided alternative proposals for student-loan reforms that nonpartisan experts, such as the Government Accountability Office (GAO) and the CBO, as well as many Republican House members, reported could have achieved similar tax savings without costing students and their families. Doing so, however, would have required a larger government role in administering student loanssomething that is anathema to pro-business ideologues like Boehner. The alternatives also would have cut into the profits of the private lenders who make student loans and who have been very generous donors to Republicans, especially Boehner, in the last several years.

Boehner says he cares about his constituents’ dreams, but the Republican changes to the student-loan program clearly make it tougher for students to realize theirs. And Boehner talks about respecting constituents’ values, but the groups whose values he served best in this case were those of his political donors, the companies that make money offering student loans.

Educational lending companies and their employees have given a total of $3.5 million to members of Congress since the 2004 election cycle, according to data provided by the Center for Responsive Politics (CRP)three-quarters of that amount to Republicans. And more than half a million dollars went to just two men: the chairmen of the subcommittee and committee that handled the changes to the student-loan program. Howard P. “Buck“ McKeon of Santa Clarita, California, chairman of the Twenty-First Century Competitiveness Subcommittee, collected the most: $262,000. Boehner, who headed the House Education and the Workforce Committee until stepping down to assume his new leadership post, came in a close second with $236,000. Sallie Mae, the nation’s largest educational lender, has been the single biggest donor to Boehner’s PAC since 1989, contributing a total of $122,000, according to CRP data.

This is hardly the first time Boehner has been vulnerable to charges of undue lobbyist influence. He is notorious for having once handed out tobacco lobbyist checks on the floor of the House. And The Chronicle of Higher Education reported that, in December, Boehner told a meeting of lenders anxious about the pending changes to the student-loan program, “Relax. Stay calm.... At the end of the day, I believe you’ll be at least satisfied, or even perhaps happy” with the changes. “Know that I have all of you in my two trusted hands,” he said.

Boehner says that, despite appearances, his two trusted hands actually delivered for students and parents. The changes don’t raise borrowing costs. The tax savings, he claims, are really coming from the profits of middlemen like Sallie Mae, Nelnet, and Citibank, which market, process, and package the loans. (These companies raise capital to lend out to students, but the government pays a portion of the interest and guarantees against most of the risks of default.) It’s certainly true that the bill did take some savings out of the hides of the lenders. It phases out the 3 percent origination fees that some (though fewer and fewer) banks were charging students. Congress also made lenders absorb 1 percent more of the cost of student defaulters. Andin a move that Boehner initially opposedit phases out a controversial program that would have guaranteed some lenders annual profits of 9.5 percent on a comparatively small group of loans (an estimated $17 billion out of the $400 billion outstanding).

But other subtle changes in the bill will create new business and profits for the lenders that should offset these losses. Congress put a stopper on an increasingly popular program in which universities themselves lend to students, thus saving the lenders from increased competition. It also upped the maximums that freshmen, sophomores, and graduate students can borrow from the federal government, increasing the amount of guaranteed-return business lenders can do. At the same time, it kept the total amount of federal debt undergraduates can accrue capped at $23,000, thus allowing for the continuing boom in the far more profitable private educational lending market. All in all, Wall Street analysts and lenders say, the bill won’t hurt business.

Congress could have achieved the same or even greater savings without forcing already financially pressed students and their families to shoulder even more debt had it been willing to take some business away from Sallie Mae and other lenders. Congress could have expanded a Clinton-era program in which schools forward loan applications directly to the federal government, rather than to middlemen. Several GAO and CBO studies have found that the direct-lending program costs taxpayers much less than extending loans through lenders like Sallie Mae. Government watchdogs have estimated that every dollar loaned through these middlemen costs the federal government at least 9 cents. The government, of course, can borrow more cheaply than businesses can. And it doesn’t have to pay investors dividends or CEOs eight-figure pay packages like the $95 million taken home from 2000 to 2004 by Sallie Mae Chairman and former CEO Albert Lord. Little wonder that various analyses have found that loans made directly may actually earn the government 2 percent, or, at the very worst, lose only about 2 percent. Having schools funnel consolidation loanswhich new graduates typically take out to combine all of their federal education debts into one fixed-rate loandirectly to the federal government could have saved more than $3 billion a year, the GAO says.

Boehner and other Republican leaders not only torpedoed any expansion of the direct-lending program, they even made subtle changes (taking away the program’s guaranteed funding, for example) that will likely reduce the direct-lending program’s scope in the future, thus costing taxpayers more over the long run. The end result, says Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, is that lower- and middle-class families will pay more to give their kids the education now needed to have a chance at a decent job, “while the playing field is tilted in the favor of lenders,“ who happen to be big contributors to Boehner and his party. Concludes Nassirian, a longtime observer of educational politics in Washington, “Boehner will be a worthy successor to Mr. DeLay.”

Kim Clark is a senior writer for U.S. News & World Report. This article appeared in the February 20, 2006 issue of the magazine.

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