Bailout

Student loans and fiscal policy

By Felix Salmon

I don’t even pretend to understand the parliamentary mechanism by which the long-overdue overhaul of the student loan system was pushed through inside a health-care reconciliation fix. Certainly that says a lot about how dysfunctional Congress is.

But it gets worse. Simplified, the question was what to do with the $60 billion or so over 10 years that the government will save by no longer subsidizing private student lenders through guaranteeing their loans. The Republicans, who wanted to keep the status quo, evidently thought that Sallie Mae et al were a great place to send that money. The Democrats, by contrast, thought it would be better spent on “federal grants to needy students and help fund other federal education programs, such as support for community colleges and historically black schools”.

You probably won’t be surprised to hear that I’m with the Dems on this one. (And so, interestingly, are a majority of Republicans.) But note what happens when the government finds a large annual savings somewhere in the budget: the money immediately gets spent elsewhere. As far as I can tell, no one seriously proposed that the private loan guarantees be abolished with the savings simply going towards a lower annual deficit. Right now, that money is (weirdly, indirectly, inefficiently) being spent “on education”, and so we have a bipartisan consensus that it should therefore continue to be Spent On Education going forwards, even if the original expenditure was wasteful and nonsensical.

And not just spent on education in general — the money must be spent on tertiary education in particular. Heaven forfend that savings from one part of the education budget might be spent on, say, shoring up holes in the K-12 area. When it comes to federal budgets, money is most certainly not fungible.

Politicians are always good at lauding inputs rather than outputs: you can be sure that Democrats will talk proudly, in the next election, at least to certain constituencies, of how they increased funding for community colleges and historically black schools. And they’ll do that regardless of whether or not the quality of education at those colleges actually improves. Which is why reducing government spending, even when we’re running a trillion-dollar deficit, is such an incredibly difficult thing to do.

Update: OK, this makes a little more sense: Matt Yglesias says that “some of the saved money is going to finance Affordable Care Act activities in the early years” — which means that it’s not all going into tertiary education, and that including the bill in the health-care reform process has at least some justification.

Full post as published by Macroprudential on March 26, 2010 (boomark / email).