Student Loans and Corporate Gravy

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The Bangor Daily News (Maine)

Student Loans and Corporate Gravy

Let me begin with a pop quiz. Who remarked: "The proposal of any new law or regulation of commerce that comes from [merchants and master manufacturers] ought always to be listened to with great precaution.  It comes from an order of men who have generally an interest to deceive and even oppress the public."? (Answer a. Karl Marx, b. John Maynard Keynes, c. John Kenneth Galbraith, d. Adam Smith).

It is not news that economic inequality has been on the rise over the last three decades. What is surprising is that these trends have become more pronounced than even many left and liberal economists believed and that that the trends show no sign of abating. Even more surprising is the role that government plays in exacerbating inequality. The federal government, which conservatives often portray as a modern day Robin Hood, robbing from the rich to support the poor, is often an agent of the rich.

Between 1979 and 2004, the bottom quintile of the economic pyramid saw its income increase only 2 percent, while the wealthiest 1 percent saw a 153 percent increase in income. The share of income going to the top 1 percent is greater than at any time since 1929.

When progressives present such statistics, they are accused of promoting a politics of envy. Don't we know that this is a classless society, where everyone can hope to become rich? The magic of the market can deliver wonders to everyone willing to work hard enough.

The modern version of Horatio Alger, endorsed by many liberals as well as conservatives, argues that the young only need study hard in school and go to college to gain a piece of the American dream. Yet not only has college become ever more costly, the road to the college degree has been strewn with toll booths that now serve to further enrich the wealthy. The federally subsidized college loan is a classic instance of the way government programs designed to assist poor and working class families have become an instrument to advance the economic interests of the wealthy and well-connected.

The U.S. government currently operates three parallel student loan programs: 1) The Federal Perkins Loan Program, 2) The Federal Family Education Loan Program, where the federal government guarantees and subsidizes loans made by private lenders and 3) The Federal Direct Loan Program, which mirrors the FFELP except that the Federal Government is the lender instead of a private lender.

The Direct Federal Loan Program offers a better return on the taxpayer's dollars than government subsidized FFELP loans. Since FFELP loan repayment is guaranteed by the government, private corporations take no risks and provide no value not achieved by the public program. In a recent column, Boston Globe columnist Robert Kuttner points out: "the direct loan program does better than break even, while the private loan program costs taxpayers $12.80 for every $100 borrowed. Most of those extra costs go for company profits. If all reduced-rate loans had been made through the direct loan program … we would have saved $30 billion since 1994, the year Congress revised and expanded the federal program." Yet despite the costs and inefficiency of subsidizing private firms, Congress continues to keep them in the mix.

Kuttner goes on to charge that that many financial aid offices have been corrupted by lucrative offers from private financial corporations eager to have students steered their way. But evidence that such practices are widespread is scant to nonexistent. (No Maine schools have been implicated in this scandal.) A larger problem is that direct federal grants and loans have failed to keep pace with the costs of college education. Many students and their families need private loans in addition to student loan programs sponsored by government, thereby creating more opportunities for private financial institutions to flourish. Simply eliminating the federally subsidized private loan program and using the savings to expand direct loans to students would be a modest step toward expanding real educational opportunity, but that is not the way our system currently operates. Too many financial institutions would lose their guaranteed gravy.

From no bid contracts in Iraq to cheap leases of oil and timber reserves to extraordinarily generous patent and copyright protection, many U.S. corporations are recipients of a continuing largesse that has bred and reflected a sense of entitlement. Adam Smith, who admired markets, also deplored the willingness of the wealthy to use power and privilege to corrupt markets.

Smith, the author of the lines in my opening paragraph, also famously remarked: "People of the same trade seldom meet together but the conversation ends in a conspiracy against the public or in some diversion to raise prices." Disgust with gaping inequality today hardly reflects envy. It emerges from concerns that even Adam Smith would likely have shared about the way the powerful and privileged often use market and political power to limit opportunities for most of us.

John Buell

John Buell lives in Southwest Harbor, Maine and writes on labor and environmental issues. His most recent book, published by Palgrave in August 2011, is "Politics, Religion, and Culture in an Anxious Age". He may be reached at jbuell@acadia.net.

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