The Lender of Venice?

Representative George Miller and House Democrats have made their first formal announcement describing their plan to cut student loan interest rates in half. Here's the kicker: it looks like all those stories about the deficit mess impacting the Democrats' agenda are spot on. How so?

The House Democrats are not going to break a campaign promise so soon after an election. They're just going to spread out their promise a little bit, like over the next five years. And they're going to limit it to subsidized loans only.

You can read a full breakdown here, but the bottom line is: the House Democratic bill will cut subsidized, undergraduate Stafford loan borrower interest rates once a year each year over the next five years. The steps look like this: cut the current rate of 6.8% to 6.12% in 2007; 5.44% in 2008; 4.76% in 2009; 4.08% in 2010; and 3.40% in 2011.

Spreading the cut over five years and keeping it to subsidized loans reduces the cost of keeping their promise, but the House Democrats' announcement still doesn't publicly put a dollar figure on the actual cost. It will be less than the $60 billion some have suggested. In fact, the cost will be less than the $10 billion barrier over the next five years. As such, the House Democrats' trimmed down plan indicates that lawmaker offsets will amount to less of a 'blood taking' from lenders and something more akin to a 'pound of flesh.'

Ironically, there's new news about extra fat in the Sallie Mae-dominated, Federal Family Education Loan (FFEL) program for the taking. Wall Street's leading stock rating group says Sallie Mae is still lucrative as all get out, despite expected lender subsidy cuts -- and that was before the House Democrats released their scaled down plan. According to Morningstar Rating Service's most recent analysis (premium subscription required) Sallie Mae is in "five star shape." Here are the greatest hits from the Morningstar Workup on Sallie Mae from January 4, 2007:

• "We believe Sallie's wide moat should protect its profits over the long haul."
  
  
• "Federally guaranteed student loans are an extremely attractive asset for lenders. By virtue of its guarantee, the government almost completely eliminates credit risk from federal loans."
  
  
• "In addition, the total cost of a higher education continues to outpace inflation, and national enrollment is expected to grow, leading to what we think is a nirvana like growth story for lenders."
  
  
• "Sallie is in a great position to offer its private loans to borrowers, and this has resulted in an average annual growth rate in its private loan portfolio of almost 40% since 2001. Private loans are also roughly 3 times more profitable than federal loans, thanks to higher interest rates, even after adjusting for credit risk."

Far be it from us to hope someone gets in the way of a "nirvana like growth story for lenders." Except for those (bought and) paid for by the loan industry, there's consensus among the alphabet soup of reliable analytical organizations (CBO, GAO, OMB, COFFI) that say the FFEL program is full of taxpayer waste.

Even Wall Street's Morningstar is reading from that playbook. Just take at look at this gem from Morningstar's "Bears Say" section:

"The government has plentiful resources and a very vested interest to self-originate government-backed loans, because it costs the government less than if lenders like Sallie originate loans."

The House Democrats plan may not be everything that families were hoping for, but the mess of red ink in Washington and desire for quick action was bound to cause problems. The cut still looks like good news for students. The lenders are probably hoping that this is as bad as it gets.