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US Rep. Scott Garrett
The Other Public Option
September 26, 2009

In 1993, Congressional Democrats worked with newly sworn-in President Bill Clinton to create the William D. Ford Federal Direct Loan Program, a student loan public option meant to compete with private student loan issuers. "We are not taking a free enterprise system and federalizing it,” then-Deputy Education Secretary Madeleine Kunin said. "We are...improving the entrepreneurial and competitive possibilities.” Sound familiar?

Fast forward sixteen years and the new Congressional majority is again working with a newly installed President on a public option, this time a public option for health care insurance. President Obama’s chief ally in the Senate, Dick Durbin, said on Meet The Press last Sunday that this public option is a way to make sure there's competition for these private health insurance companies. The President himself has said that the public option will force the insurance companies to compete and keep them honest.

The student loan public option should serve as a cautionary and instructional tale for Congress and the American people as we continue to discuss ways to reform the health care system. Right now, over 80% of student loans issues are federally guaranteed – about two-thirds of those are issued through private lenders, while the remaining third are secured directly through the public option. Though both public lenders and federally guaranteed private lenders offer relatively similar interest rates and payment plans, more than twice as many students and parents choose private options because of universities’ preference and superior customer service.

On Thursday, the House passed a bill (H.R. 3221) that will, if signed into law, eliminate private loans with federal guarantees, replacing such loans entirely with the government’s Direct Loan program – in other words, removing the optionality of the public option – at a cost of $1 trillion over the next ten years. In addition to crowding private capital out of the industry, this bill gives the public student loan programs advantages the private sector will be unable to match. For example, the bill gives federal loans a variable interest rate when rates are on the decline and a cap when rates go back up. The plan also locks in low fixed-interest rates on certain loans. Once the Federal Reserve’s spending spree results in unavoidable inflation, the Treasury will likely be paying to lend this money. All of these provisions lead to an unsustainable plan described by the Wall Street Journal as a kind of heads-borrowers-win, tails-taxpayers-lose offer [that] will be difficult for a private company to match.

Since 1965, private loans carrying a federal guarantee have been the most common means of borrowing to finance a college education. It took less than two decades for the public option to crowd out private student loan providers, leaving students, parents, and universities with an "option” that they have rejected by a two-to-one margin.

The idea that government can compete with private health insurance – while setting its own rules for competition – and remain optional defies both history and basic economic principles. I support real health care reform that is portable, affordable, sustainable, effective, and innovative.

US Rep. Scott Garrett
On January 6, 2009, Congressman Scott Garrett (R) was sworn in to his fourth term in the United States House of Representatives, representing New Jersey's Fifth Congressional District. He was first elected to Congress in 2002. Scott is a leading advocate of tax relief and pro-growth economic policies that return the focus to the family budget, authoring and supporting initiatives that keep more of your money in your pocket. He has been working to improve accountability and transparency in budget procedures and other government practices to ensure that government is responsive to your needs. Congressman Garrett maintains a website here.