James Surowiecki has an excellent finance column in this week’s New Yorker that drives home the message of one of our Countdown to Change campaign issues: that students, not banks, should be benefiting from government help for education. From The New Yorker:
[...] For decades, student-loan companies have had one of the cushiest businesses in America. We want college students to be able to finance their education at reasonable rates. But banks are understandably leery of lending to people with no collateral and uncertain future earnings. So we provide incentives to lend. The federal government, for instance, guarantees the so-called Stafford loans that college students get: if a student defaults, the government will pay off almost the entire loan. On top of that, the government hands out billions of dollars in subsidies to lenders every year, all but insuring them a steady profit. In effect, lenders get a guaranteed return with very little risk.
This convoluted process is good at making student-loan companies richâ€”Sallie Mae, the biggest issuer of student loans, earned $1.3 billion last year, with a return on equity that dwarfs most other companiesâ€™. But itâ€™s not very good at getting government money to students cheaply and efficiently. President Bushâ€™s 2007 budget shows, for instance, that itâ€™s four times as expensive for the government to subsidize and guarantee private loans as for it to issue those loans itself. In other words, the current system is not just corrupt. Itâ€™s also inefficient. So why are we stuck with it? [full text]
Business Week’s front page article this week, The Poverty Business, covers the recent boom in businesses and lenders preying on the poor. It elucidates a principle that my husband is fond of pronouncing — that it’s very expensive being poor.
In other news of poverty on the march, it appears from this piece by Paul Krugman that our new Democratic Congress was not able to forward one of the most important legislative initiatives of the first one hundred hours — that of negotiating drug prices for the Medicare seniors drug benefit. This is a huge disappointment to me, and to millions of families across the nation who were hoping for relief from the financial toll on seniors caused by the exorbitant cost of prescription drugs. Saddest of all, perhaps, is that the NAACP and the League of United Latin American Citizens have been complicit in this plot against medicare. From Krugman:
The plot against Social Security failed: President Bush’s attempt to privatize the system crashed and burned when the public realized what he was up to. But the plot against Medicare is faring better: the stealth privatization embedded in the Medicare Modernization Act, which Congress literally passed in the dead of night back in 2003, is proceeding apace.
Worse yet, the forces behind privatization not only continue to have the G.O.P. in their pocket, but they have also been finding useful idiots within the newly powerful Democratic coalition. And it’s not just politicians with an eye on campaign contributions. There’s no nice way to say it: the NAACP and the League of United Latin American Citizens have become patsies for the insurance industry.
To appreciate what’s going on, you need to know what has been happening to Medicare in the last few years.
The 2003 Medicare legislation created Part D, the drug benefit for seniors – but unlike the rest of Medicare, Part D isn’t provided directly by the government. Instead, you can get it only through a private drug plan, provided by an insurance company. At the same time, the bill sharply increased payments to Medicare Advantage plans, which also funnel Medicare funds through insurance companies.
As a result, Medicare – originally a system in which the government paid people’s medical bills – is becoming, instead, a system in which the government pays the insurance industry to provide coverage. And a lot of the money never makes it to the people Medicare is supposed to help.
In the case of the drug benefit, the private drug plans add an extra, costly layer of bureaucracy. Worse yet, they have much less ability to bargain for lower drug prices than government programs like Medicaid and the Veterans Health Administration. Reasonable estimates suggest that if Congress had eliminated the middlemen, it could have created a much better drug plan – one without the notorious “doughnut hole,” the gap in coverage once your annual expenses exceed $2,400 per year – at no higher cost.
Meanwhile, those Medicare Advantage plans cost taxpayers 12 percent more per recipient than standard Medicare. In the next five years that subsidy will cost more than $50 billion – about what it would cost to provide all children in America with health insurance. Some of that $50 billion will be passed on to seniors in extra benefits, but a lot of it will go to overhead, marketing expenses and profits.
With the Democratic victory last fall, you might have expected these things to change. But the political news over the last few days has been grim.
First, the Senate failed to end debate on a bill – in effect, killing it – that would have allowed Medicare to negotiate over drug prices. The bill was too weak to have allowed Medicare to get large discounts. Still, it would at least have established the principle of using government bargaining power to get a better deal. But in spite of overwhelming public support for price negotiation, 42 senators, all Republicans, voted no on allowing the bill to go forward.
If we can’t even establish the principle of negotiation, a true repair of the damage done in 2003 – which would require having Medicare offer seniors the option of getting their drug coverage directly, without involving the insurance companies – seems politically far out of reach. [full text]
With my own mother being almost 82 years old, I am perhaps more keenly aware of what goes on in the latter years of life and how much we as a culture seem to be in denial about how to help older Americans maintain their health as well as their financial independence. This piece in The New Yorker describes the lack of gerontology specialists across the country. It also makes clear that the only way to ensure any quality of life for yourself in old age is to save your own money so that you can afford things like medication and assisted living.
Issues discussed in the interview include: the Iraq War and Senator Reed’s response to the President’s current plan, Senator Reed’s plan going forward in conjunction with Senator Levin, the Biden-Gelb plan and its feasibility, concerns regarding the long-term effects of war on American military service personnel, including PTSD, and whether our VA’s are funded to handle the issues, health care and the crisis of the uninsured, Senator Reed’s efforts to fund SCHIP for the state of Rhode Island, the medicare prescription drug benefit and Reed’s support of the proposed changes, education funding from the national level and fulfilling the promise to fund special education under IDEA, addressing the national deficit by stopping the President’s tax cuts, funding alternative energy projects in the US. The interview is approximately 22 minutes long.
The white collars at Sallie Mae are starting to get a little sweaty. First, the House of Representatives passed the new student loan legislation to reduce interest rates. Now Rep. Tom Petri (R-Wis) has introduced the The STAR Act (link here) which will help steer students toward Direct Lending as opposed to Sallie Mae. This is going to be a serious battle. As my source says, “Private lenders (Sallie Mae) are going send out their lobby in force. The industry is prepared to die on the hill. “
The STAR act would also increase funding for Pell Grants, which is much needed. Gordon Smith (R-OR) and Edward Kennedy (D-MA) are cosponsoring companion legislation in the Senate.
So why do we need banks for student loans? Well that’s just it: we don’t. And now that this boondoggle is being exposed, private lenders are going to be scrambling for position in the political landscape.
Countdown to Change Concludes Monitoring First 100 Hours in Record Time
The Countdown to Change project has now concluded monitoring the First 100 Hours of the Democratic Congress. In just under 43 hours, the new House leadership, under Speaker Nancy Pelosi, moved swiftly to enact a series of proposals that address the top domestic concerns of most Americans. We are pleased to report that our efforts helped to provide coverage to Rhode Islanders on these watershed shifts our government is making to be more responsive to its citizens. We are also glad to hear Democrats saying that this is only the beginning of the changes that can be made to bring about a more healthy, safe and productive world.
The Countdown to Change project divided up coverage of each of the following issues on the respective blogs of Kmareka.com, Pat-Crowley.org and RIFuture.org:
Lobbyist, Ethics and Fiscal Responsibility Reform (Draining the Swamp) â€“ Pat Crowley provided extensive coverage of this legislation which was passed by a vote of 280 to 152. 48 Republicans approved the reforms along with 232 Democrats.
Enact 9/11 Commission Recommendations â€“ RI Future monitored the this legislation which passed by a margin of 299 to 128.
Increase Minimum Wage â€“ Pat Crowley reported on this issue, (with help from Peter Asen). The minimum wage hike was passed by a huge margin of 315 to 116.
Expand Stem Cell Research– This legislation passed by a margin of 253 to 174 (not enough for an override), RI Future.org reported on this issue.
Negotiate for Lower Prescription Drug Prices â€“ Kmareka reported on this legislation, which passed by a margin of 255 to 170.
Cut Interest Rates on Student Loans â€“ Kmareka reported on this legislation, which passed by a margin of 356 to 71, with the highest number of Republicans joining Democrats to pass this bill.
End Subsidies for Big Oil and Invest In Renewable Energy â€“ RI Future reported on this legislation which passed by a margin of 264-163.
Kiersten Marek of Kmareka.com said: â€œThe joke is that this is what you get when you put a woman in charge: 100 hours worth of work done in 43 hours. The truth is that even working double-time, our leaders have a great deal of challenges ahead of them. The need for collaboration, for people of all backgrounds to find common ground, has never been greater. We are thankful for these first efforts and look forward to reporting on the bigger changes as they come.â€?
Matt Jerzyk of RIFuture.org said: â€œRhode Island was a key state in ensuring that Democrats took control of Congress and I think Rhode Islanders are seeing that their investment was justified. Important investments in stem cell research and renewable energy were promptly debated and passed and the nation should feel more secure with the full passage of the 9/11 recommendations. It was truly informative and educational to witness and blog the laborious process that each bill must travel before passing and I hope to continue to provide more comprehensive coverage of Congress with the rise to power of Rhode Island Democrats in Congress.â€?
Pat Crowley of Pat-Crowley.org said, “More and more American’s are getting their political news from the Internet. What the Countdown to Change project did was allow people not just to read about the news on Capitol Hill, but actually take part in ways that they can’t do with traditional media. “
My sources have sent on to me a “confidential” document from Senator Ted Kennedy’s office, which includes a 21-page new bill called “The Student Loan Sunshine Act. ” This bill seeks to increase the accountability of lenders to students, and reduce any possible ethical problems created by gift-giving. The person who sent the email summarized the content of the bill as such:
This second draft will prohibit any lender from giving any form of gift, whether it be a small gift of a pen or popcorn, transportation, dinner, etc. to any college or university. In addition, it would prohibit any college or university from using their logo, letterhead or any other college communication that a college offers a loan, when in effect, the lender is offering the loan. They have added strict accountability measures to the Dept. of Ed, mandating a hearing for failure to provide this information. And, in addition, Financial aid offices would have to report which lenders they have agreements with, and the rationale for these agreements.
The idea here appears to be to increase accountability of lenders by asking them to prove that they are benefitting borrowers by (presumably) offering them a fair interest rate for their loans. Another aspect of the bill will help reduce contract steering between educational institutions and lenders, so that all lenders, big and small, have the opportunity to provide loans to students in a more free-market competitive manner.
We’ll be keeping our eyes peeled and our sunglasses ready for the upcoming appearance of the “Student Loan Sunshine Act.” The future’s looking so bright, I gotta wear shades.
Matt Jerzyk at Rifuture.org has a post which provides a good summary of HR 6 and the context in which Congress is attempting to hold the oil industry more accountable:
Today, in Hour 36 of the First 100 Hours, the House will take-on one of the biggest friends of the Bush Administration: Big Oil.
This legislation, HR 6, will cut an estimated $13 billion worth of handouts to the oil industry. The money saved and generated from this legislation will be placed into a renewable energy fund to make the United States less dependent on foreign oil. That’s right. We are taking money from big oil companies who could care less about clean energy and putting the money into a fund to develop renewable energy. What a novel idea!
More specifically, the legislation would impose a “conservation fee” on oil and gas taken from deep waters of the Gulf of Mexico, scrap nearly $6 billion worth of oil industry tax breaks enacted by Congress in recent years and seek to recoup royalties lost to the government because of an Interior Department error in leases issued in the late 1990s. [full text]
Good news, everyone! Senator Reed’s office contacted me today and they are interested in having me sit down with the Senator for an interview. Here’s where you do your part and help me plan the topics for this interview. Comment away all you several hundred people out there who are coming to this place every week!
One idea that David suggested was approaching the interview from a social work perspective and talking about the number of walking wounded returning to the US from Iraq. Another thought of David’s was to ask Senator Reed had any regrets about votes he has made in the past while. Also, David suggested trying to elicit his forward-thinking vision for the Iraq war.
On a more personal note, I am looking forward to congratulating the Senator personally on the birth of his daughter. This is a great occasion in his life.
The Chronicle of Higher Education has a detailed description of the changes and controversy surrounding today’s legislation to be voted on in the House of Representatives. The article is quoted in full below, in order to provide public education on this legislation:
The Democratic leaders of the U.S. House of Representatives are taking aim at the largest student-loan providers to pay for the lawmakers’ plan to halve the interest rate on federal student loans.
Democratic lawmakers are planning to hold a vote this week on legislation that would gradually reduce the student-loan interest rate, to 3.4 percent from 6.8 percent, over the next five years.
In discussions with college lobbyists, aides to the Democratic leaders revealed how the lawmakers propose to pay for the proposal, which is expected to cost the government about $5.9-billion over that time period. Nearly one-third of the money needed to pay for the interest-rate cut would come from savings generated by reducing the profit margin that the top private lenders receive on federal loans.
In the guaranteed-loan program, the government ensures lenders a rate of return that is separate from and usually higher â€” at least over the last decade â€” than the rate students are charged.
Under the Democratic plan, the top 1 percent of lenders, who hold 90 percent of the loan volume, would see the guaranteed rate reduced by 0.1 of a percentage point. For example, the current rate that lenders are guaranteed is 7.72 percent. Under the proposal, the rate would drop to 7.62 percent.
The lawmakers said that about 30 lenders would be affected, including Sallie Mae, the nation’s largest student-loan provider, Citibank, Wells Fargo Bank, and Bank of America.
Loan-industry officials wasted no time attacking the proposal. “This penalizes the lenders that have shown the deepest commitment to the program by their size,” said John Dean, a lawyer for the Consumer Bankers Association.
Critics of the student-loan industry said that limiting the rate reductions to the largest lenders was a savvy move, as it would protect Democrats from one of the Republicans’ main lines of attack. “This insulates the Democrats from charges that their proposal will force small lenders out of the loan program,” said a student-loan analyst who did not want to talk publicly until the bill was formally unveiled.
Rep. George Miller, the California Democrat who is chairman of the House Committee on Education and the Workforce, was planning to introduce the bill late last week.
Other Proposed Changes
In addition to the cut in the rate of return that the top lenders receive, Democrats plan to propose making changes in the guaranteed-loan program, effective July 1, that would:
Reduce the amount of money that the government reimburses lenders for loans that go into default, from 97 cents to 95 cents of every dollar that is unpaid.
Eliminate a program in which the government fully reimburses lenders it deems “exceptional performers” for loans that are not repaid. The department awards this designation to lenders that it believes provide the most reliable service to students.
Increase to 1 percent, from 0.5 percent, the one-time fee that lenders in the guaranteed-loan program must pay the government when making student loans.
Reduce to 20 percent from 23 percent the amount guarantee agencies can keep for themselves from the money they recover from borrowers who default. The proportion would drop to 16 percent by 2010.
In a written statement, Joe Belew, president of the Consumer Bankers Association, said that if Congress made those changes, “the ability of lenders to invest in technology, enhance customer service, and offer benefits to borrowers” would be put at risk.
The bankers’ group noted that Congress cut the payments that lenders receive from the government by $8-billion last year, as part of legislation pushed by Republicans to reduce the federal budget deficit.
“This program, which has been highly reliable and serves students attending 80 percent of all U.S. colleges and universities, cannot sustain annual deep budget cuts without the quality of services to borrowers being hurt,” the bankers’ group said.
But Democrats and advocates for students defended the planned cuts, noting that most of them had been proposed by the Bush administration and Congressional leaders. For example, President Bush had called for cutting the amount of money that the government reimburses lenders for defaulted loans as part of his 2006 fiscal year budget request. The Senate, meanwhile, passed a budget-cutting bill last year that would have eliminated the Education Department’s program for rewarding lenders it deems exceptional.
The Democrats also pointed to a report put out by financial analysts at Citigroup last week that said the proposed cuts would be “manageable” for Sallie Mae. The analysts actually characterized the news as positive for Sallie Mae because the proposed cut in the rate of return for top lenders was less severe than they had initially feared.
My opinion, for what it’s worth: Yes, that’s right, big bankers, we’re asking you to shoulder some of the costs of this proposal. Why? Because we will all benefit from a less debt-ridden, better-educated populace.
Medicare Prescription Drug Reforms Pass the House but face trouble in the Senate and a possible Presidential veto, according to this article in the SF Gate.
The article also tallies up the passed bills and provides the forward-looking schedule for next week:
Implement Sept. 11 commission recommendations — passed.
Raise federal minimum wage — passed.
Expand federal funding for embryonic stem cell research — passed.
Order Medicare to negotiate discount prices for its prescription drugs — passed Friday.
Cut interest rates on student loans — scheduled for a vote Wednesday.
End about $20 billion in oil and gas industry tax breaks — scheduled for a vote Thursday.
Time elapsed: 23 hours, 34 minutes of the 100 hours after Friday’s vote.