A brazen government takeover

Sen. Lamar Alexander, R-Tenn., calls it the “most under-reported big-Washington takeover in history,” and even that may be an understatement.

Alexander, a former U.S. secretary of education, is referring to the federal takeover of student loan financial services, a move that happened as part of the massive health-care bills that were narrowly passed by Congress. Go figure: A major revamp of an entire lending sector as part of health-care reform.

It seems the change is big enough to warrant stand-alone legislation, along with considerable debate and news coverage. Instead, it has been a mere footnote in health-care reform that has mustered very little news coverage.

The White House is pitching the change as a benevolent improvement that will increase student Pell Grants, and Democrats are touting it as a reform that will “save taxpayer money.”

Student loans are currently originated by private lending institutions, with the government providing about $9 billion in annual subsidies on guaranteed student loans.

According to Alexander, however, there won’t be any taxpayer savings because the money will simply be redirected to help pay for the new health-care bill.

“This is how it will work: The federal government will borrow money at 2.8 percent and then lend it to students at 6.8 percent — spending the difference on health care and new government programs,” Alexander said.

And that means students will be paying more in interest on their loans than they have been. And there are more downsides to it all.

The federal government will assume the responsibility of originating loans, meaning that there will be far less competition in lending, even if the Obama administration does outsource “loan servicing contacts” to private lenders such as Sallie May. That’s just a more selective way of continuing subsidies.

Meanwhile, lobbying groups such as the Financial Services Roundtable are predicting the private lending sector will shed thousands of jobs.

But even that’s not the last of the repercussions. As with Fannie Mae and Freddie Mac home lending, it appears a lot of federal lending to students may never be repaid.

One provision outlined in a White House press release says that borrowers “will be allowed to cap their student loan repayments at 10 percent of their discretionary income and if they keep up with their payments over time, forgive their balance after 20 years.”

As with the rest of the health-care legislation, one’s mind is boggled that these are the priorities of our political leadership when millions of people are unemployed and the country is mired in a recession.