Can You Nationalize a Government Program?

Student loan industry officials are always good at providing the spin. Their latest gambit: accusing White House of trying to “nationalize” the federal student loan programs by proposing to provide federal student loans entirely through Direct Lending.

We have news for the lenders: it is impossible to nationalize a government program. By definition, the FFEL program is already a nationalized program because it is a government program, just like Direct Lending.

Truthfully, both FFEL and Direct Lending are very much alike. They each have the same goal of ensuring that everyone who wants to go to college has access to loans with favorable terms. In both programs, the federal government sets all of the terms of the loans in law and guarantees them against default and interest rate risk. Both programs use private companies — often the same private companies — to service and collect on these loans.

The only real differences between the two programs are the entities that originate the loans — in the FFEL program, banks and other private lenders, and in Direct Lending, the U.S. Department of Education — and the subsidies it provides these companies and other players (like student loan guaranty agencies) to carry out these services.

The loan industry’s arguments about nationalization are particularly ironic now. As we said last week, credit market disruptions have made the FFEL program untenable. Only an emergency law — the Ensuring Continued Access to Student Loans Act (ECASLA) — saved the system by allowing the Education Department to buy FFEL loans and lender federal money to lenders. In other words, the bank-based program’s survival depends almost entirely on the federal government providing federal capital to lenders to make new loans. Sounds a lot like Direct Lending to us.

Sorry, lenders, it’s a little late to complain about nationalization. Lyndon Johnson settled that fight a long time ago.