JONATHAN CHAIT JANUARY 28, 2011
News stories about Paul Ryan have increasingly come to resemble an open competition for the job of Paul Ryan's press secretary. The latest audition, from ABC News, actually compares him to Kevin Kline's character in "Dave," an earnest wonk combing through the federal budget for examples of waste. I am not joking:
Hilariously, the result of Ryan's Dave-like search through the budget -- and the only example of a putative budget savings mentioned anywhere in the piece -- is his claim to have discovered a savings in the student loan program. In fact, this example is exactly the opposite of what Ryan (and the story) proclaim.
The old federal student loan program guaranteed loans made from private banks to students. This gave the banks incentive to shovel money out the door, knowing Uncle Sam would back them up in case of failure, which of course happened constantly. President Clinton cut, and then President Obama eliminated,the subsidy to the banks, saving taxpayers tens of billions of dollars. Here is the Congressional Budget Office's description:
“Despite the many similarities between the FDLP [Federal Direct Loan Program] and the FFEL [Federal Family Education Loan, aka guaranteed lending] program, the latter is significantly more costly for the federal budget. For example, CBO recently estimated that the President’s proposal to eliminate the FFEL program and replace it with additional direct lending would save the government a total of $62 billion between 2010 and 2020. Although the federal cost per dollar of student loans originated varies from year to year and among different types of loans, a loan made in the FFEL program consistently shows a much higher budgetary cost than if it had been made in the direct loan program…
The higher costs in the guaranteed loan program (on both a FCRA and a fair-value basis) result mainly from the way in which the government compensates FFEL lenders. Payments to those lenders are fixed in legislation rather than set through a mechanism—such as a competitive bidding process—that ties reimbursement to actual costs incurred. In general, those statutory payments appear to exceed lenders’ basic administrative costs and their funding costs under normal market conditions (although during the financial crisis, the payments proved too low to cover the surge in lenders’ borrowing costs). Because FFEL lenders must compete to attract borrowers, any difference between the statutory payments they receive and their basic costs is mostly absorbed by increasing marketing efforts, enhancing the administrative services they provide, or offering other benefits to schools and students. Thus, competition between lenders benefits schools and borrowers rather than lowering costs to the government. In addition, FFEL lenders fund their loans in the capital markets, which introduces additional costs and risks to the program that do not arise when loans are funded through the Treasury.”
Ryan is a fervent ally of the college lending industry. In 2007, he was one of only 71 Republicans to vote against the College Student Relief Act, which would have cut the interest rate on many student loans, including the FFEL program, in half. Inside Higher Ed notedthat the bill would cut “deeply and directly into lenders' profits.” The bill passed the House 356-71, but stalled in the Senate.
So, that's the one idea this fresh-faced reformer comes up with the balance the budget: shovel billions of dollars in extra subsidies to an inefficient and wildly corrupt industry whose water he has faithfully carried. And this isn't an exception --Ryan's record is one of wild fiscal profligacy. I realize he's cute and energetic and exudes an aw-shucks Midwestern earnestness, but the reality bears absolutely no relation to the image.