The impact of the nationalization of student loans

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The decision to nationalize an entire industry is a decision you will very rarely see an American politician make. But the United States did it in 2010, with student loans. From that year, instead of the federal government guaranteeing loans from private lenders, it was content to make the loans directly itself.

Why is it important: The result says a lot about the pros and cons of nationalization.

  • The federal government quickly discovered that it would not operate like the for-profit lenders. Private lenders had a higher cost of funds than the government and also had much less sympathy for borrowers.
  • Giving politicians responsibility for the government’s student loan portfolio effectively reversed the normal dynamic between borrower and lender. It was a bit like people who had bank loans could elect their local bank manager, who in turn could cancel those loans.

The result : A federal loan program sold as generating $113 billion in revenue for the federal government will likely end up costing the government well over $500 billion.

  • By the numbers: A July 2022 GAO report estimated costs to the government, as of April 2022, at $197 billion, with the COVID-era payment moratorium accounting for $102 billion.
  • On top of that must be added an additional 8 months of debt moratorium, at about $3.5 billion per month, plus at least $300 billion (and possibly much more) for long-term debt cancellation program costs this week’s debt.

The wrong side: That’s at least $640 billion less than the amount the government was originally supposed to earn.

  • The advantage: Thanks to the nationalization of student loans in 2010, the federal government, under Obama, Trump and Biden, was able to implement policies that it could never have imposed on private lenders. These policies, in turn, have had considerable positive effects.

How it works: The federal student loan program cares more about fairness than profit. Thus, all loans carry the same interest rate and payments are capped as a percentage of income.

  • The flat rate means that high-income borrowers tend to refinance into low-rate private loans, while low-income borrowers find government loans relatively attractive. As a result, the percentage of borrowers on income-tested repayment plans has risen from 20% in 2013 to 47% in 2022. Expect it to rise even further after this week.

The big picture: When governments privatize industries, one of the main reasons cited is to take pricing decisions out of the hands of politicians. They feel unable to raise the prices themselves, so they sell the franchise to someone who can.

  • Nationalization is the same process but in reverse: it allows politicians to make pricing decisions, for better or for worse. Generally, these decisions are bad for the public treasury, but that does not mean they are bad for public policy.

Between the lines: One look at your broadband bill should be enough to convince you that running public services as private sector monopolies isn’t always good public policy.

  • Even opponents of federal student loan debt relief tend not to get nostalgic for the years (roughly 2004 to 2009) when Sallie Mae was a private sector company.

The bottom line: National ownership tends to mean cheaper prices – for better or worse.

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