Market Distortion (Letter to the Editor)

Market Distortion (Letter to the Editor)

May 11, 2004
Originally published in The Kansas City Star

Michelle Singletary's premise that subsidies are market-distorting is indeed correct ("The Color of Money," MoneyWise, May 2).

The Higher Education Act prescribing these guarantees is up for the necessary reauthorization, and some version of "reform" will likely  pass the House of Representatives this year and both the House and Senate in 2005.

The question of whether government subsidizes education borrowing may some day be on the table. For now, instead, the issue is "how?" Toward this end, Singletary's suspicion of Sallie Mae's advocacy is not without basis.

The large lenders with comfortable, subsidy-enhanced market shares like Sallie Mae not only endorse provisions in Education Committee Chairman John Boehner's legislation insulating them from competition. They also eagerly embrace this bill premised on reducing their own "excess interest earnings".

A study validated by the Congressional Research Service indicates that this premise, purportedly achieved by restricting borrower choice to variable-rate loans, might be little more than manufactured.

Congress should instead introduce further competition into the education lending program.

Rep. Boehner's bill does finally, if grudgingly, allow graduates competitive options to refinance, or "consolidate", among lenders. Allowing a variety of credit products as well would be another major maturation in that proper direction. it is noteworthy that the larger lenders oppose such reform.