Conspiracy Theory of the Day: The White House Is Gouging Students to Pay for Obamacare

The GOP is spinning a fantasy to try and get young voters angry at the Democrats.


Well, we've finally hit student loan D-Day. Thanks to Congress's failure to broker some sort of compromise that would have averted a hike, the interest rate on new subsidized Stafford loans is officially doubling from 3.4 percent to 6.8 percent, which will add as much as $39 to some borrowers' monthly payments.

Both parties have been keen to stick each other with the blame for this turn of events. Unfortunately, some Republicans seem to have settled on a particularly vacuous line of attack, which former George W. Bush economic advisor Douglas Holtz-Eakin has spun out into a astoundingly misleading column for Reuters today. "Obamacare was paid for on the backs of students," he claims, so it's Democrats who are rooting for higher rates? Here's Holtz-Eakin:

You may remember that Obamacare staggered over the legislative finish line in 2010 with $19 billion in profits from changes to the student loan program. The changes included nationalizing federal student lending and setting loan interest rates high enough to generate profits to cover the healthcare costs.
Monday, President Barack Obama and the Democratic-led Senate again put their their political and legislative priorities ahead of students and allowed their loan interest to double.

This is an absurd vision of recent history that many Republicans, including Senate Minority Leader Mitch McConnell, have embraced. It conveniently ignores what the student loan reforms included in the health care bill actually accomplished: Saving billions by ending subsidies to big banks.

When the Affordable Care Act passed in 2010, the legislation put a merciful end to what was known as the Family Federal Education Loan program. This was a costly policy relic in which the federal government guaranteed student loans made by private financial institutions, while paying them handsome fees ostensibly meant to cover administrative costs. When students defaulted on their debt, taxpayers covered 97 percent of the losses, but the profits went to the lenders. We got the risk. Wall Street got the reward.

This bizarre system had started out as a budget gimmick. Up until 1990, Congressional accounting rules essentially made it look cheaper for the federal government to guarantee private loans than to make them directly, even though it was actually more expensive. That changed in 1990 thanks to the Fair Credit Reform Act, and shortly thereafter, Washington began experimenting with direct loans to students. Thus began a nearly two-decade battle between Democrats, who generally supported direct lending, and Republicans, who preferred backstopping the private market, even though it was clearly more expensive.

The healthcare bill ended the debate by killing the guaranteed loan program for good. Since then, the Department of Education has exclusively made direct loans to students. This is what Republicans are referring to when they say Obama "nationalized" the student loan market, or that he led a "federal takeover" of it. The New America Foundation's Jason Delisle, a former Republican budget staffer, has delivered my favorite response:

"You wouldn't talk about the government taking over the Social Security program, or a government takeover of Medicare ... It didn't take over the industry. The private companies that were involved were participating in a federal program and were getting paid for that. So how do you get 'federal takeover' out of that?"

So Democrats did not meaningfully "nationalize" student loans. But by cutting out the banks as middlemen, the Congressional Budget Office determined that they did save an enormous amount of money: $58 billion over ten years, to be precise. Most of the cash -- $39 billion worth -- was recycled into expanding grant programs for low income and minority college students. That left an additional $19 billion on the table, some of which, as Holtz-Eakin suggests, has helped pay for Obamacare.

None of those savings, however, came at the expense of borrowers. When the Department of Education took over all federal student lending, it used the same interest rates that had been fixed by Congress during the Bush administration. One could argue that Democrats should have used their windfall from eliminating the guarantee program to lower rates even further. But remember, that's not what Republicans wanted. Rather, they intended to keep paying big banks to make and manage loans that Washington could finance for less. 

All this brings us back to the next most dishonest element of Holtz-Eakin's op-ed: The implication that Congressional negotiations failed because Democrats were deaf to the interests of students. As Holtz-Eakin notes, the House GOP did offer a bill that, initially, would have kept rates from doubling by tying them to the government's own cost of borrowing. But over the long term, the Congressional Research Service calculates that the GOP's plan would have cost typical future students 4 percent more than if rates were to simply rise as scheduled. In other words, there was absolutely no incentive for liberal Democrats, who generally wanted to keep rates lower than the administration or the House GOP, to accept a deal.

The bottom line is that Holtz-Eakin and his fellow Republicans are free to argue that the Democrats are wrong on student loans (plenty of smart people do). They just shouldn't resort to fantasy in order to do it.