More wacky legislation

Well, we're not quite sure what to make of Sen. Kennedy's newest (or resurrected) idea.

Details are sketchy, but the good Senator is looking to have lenders bid on rates for the loans it seems. We’re all for free markets, auctions, and any other efficient market instruments, but this proposal seems to miss the mark. All these proposals cite unaffordable college as the motivation, yet, it’s not the loan programs that cause the unaffordability. It’s the cost of tuition, fees, room, board, books, etc., etc. The loan programs merely facilitate the underlying cost of education.

We won’t even begin to rant about the ability of the government to institute a bidding system that embodies the principles of free market competition and the ability for students to pay for college. The ultimate consequence of this proposal will be student lending aggregating into a few very large competitors. With this transition we will see a reduction in service, price, and competition.

The way we see it, the best solution would be for lenders to “purchase” a portion of the federal guarantee from the Department of Education. This creates an equivalent of a “usage tax”. Now, if the government wishes to keep the FFEL program a “right” (as opposed to a privilege, as credit is traditionally treated), then the bulk of the loan guarantee fee must be shouldered by the benevolent government. We think the student lending industry would agree that there should be some cost to participate in FFEL, but since private capital is being allocated to fund the loans, there does need to be sufficient profit motivation. After all, it’s that profit motive that engineers innovation, lower costs, and better products.