In 1993, Congressional Democrats worked with newly sworn-in President Bill Clinton to create the William D. Ford Federal
Direct Loan Program, a student loan public option meant to compete with private student loan issuers. “We are
not taking a free enterprise system and federalizing it,” then-Deputy Education Secretary Madeleine Kunin said.
“We are…improving the entrepreneurial and competitive possibilities.” Sound familiar?
Fast forward sixteen years and the new Congressional majority is again working with a newly installed President
on a public option, this time a public option for health care insurance. President Obama’s chief ally in the Senate,
Dick Durbin, said on Meet The Press last Sunday that this public option is a way to make sure there's competition
for these private health insurance companies. The President himself has said that the public option will force the insurance
companies to compete and keep them honest.
The student loan public option should serve as a cautionary and instructional tale for Congress and the American
people as we continue to discuss ways to reform the health care system. Right now, over 80% of student loans issues
are federally guaranteed – about two-thirds of those are issued through private lenders, while the remaining third are
secured directly through the public option. Though both public lenders and federally guaranteed private lenders offer
relatively similar interest rates and payment plans, more than twice as many students and parents choose private options because
of universities’ preference and superior customer service.
On Thursday, the House passed a bill (H.R. 3221) that will, if signed into law, eliminate private loans with
federal guarantees, replacing such loans entirely with the government’s Direct Loan program – in other words,
removing the optionality of the public option – at a cost of $1 trillion over the next ten years. In addition
to crowding private capital out of the industry, this bill gives the public student loan programs advantages the private sector
will be unable to match. For example, the bill gives federal loans a variable interest rate when rates are on the decline
and a cap when rates go back up. The plan also locks in low fixed-interest rates on certain loans. Once the Federal
Reserve’s spending spree results in unavoidable inflation, the Treasury will likely be paying to lend this money.
All of these provisions lead to an unsustainable plan described by the Wall Street Journal as a kind of heads-borrowers-win,
tails-taxpayers-lose offer [that] will be difficult for a private company to match.
Since 1965, private loans carrying a federal guarantee have been the most common means of borrowing to finance
a college education. It took less than two decades for the public option to crowd out private student loan providers,
leaving students, parents, and universities with an “option” that they have rejected by a two-to-one margin.
The idea that government can compete with private health insurance – while setting its own rules for
competition – and remain optional defies both history and basic economic principles. I support real health care
reform that is portable, affordable, sustainable, effective, and innovative. Please feel free to share your thoughts on this
issue with my office at 202-225-4465.
