The impact of student loan nationalization

The decision to nationalize an entire industry is one that you'll very rarely see a U.S. politician make. But the U.S. did it in 2010, with student lending. From that year onward, rather than the federal government guaranteeing loans from private lenders, it just made the loans directly itself.

Why it matters: The outcome says a lot about the pros and cons of nationalization.

• The federal government rapidly discovered that it wouldn't operate like the for-profit lenders. Private lenders had a higher cost of funds than the government, and also had much less sympathy for borrowers.
• Putting politicians in charge of the government's student loan portfolio effectively flipped the normal dynamic between borrower and lender. It was a bit as if people with bank loans were able to elect their local bank manager, who could in turn forgive those loans.

The upshot: A federal lending program that was sold as generating $113 billion of income for the federal government is now likely to end up costing the government well over $500 billion.

• By the numbers: A July 2022 GAO report put the costs to the government, as of April 2022, at $197 billion, with the COVID-era payment moratorium accounting for $102 billion of that.
• On top of that needs to be added a further eight months of debt moratorium, at about $3.5 billion per month, plus at least $300 billion (and possibly much more) for the long-term costs of this week's debt forgiveness package.

The downside: That's at least $640 billion less than the amount of money the government was initially expected to make.

• The upside: Thanks to the 2010 nationalization of student loans, the federal government, under Obama, Trump and Biden, was able to implement policies it could never have imposed on private lenders. Those policies, in turn, had massive positive effects.

How it works: The federal student loan program cares more about fairness than profit. So all loans carry the same interest rate, and payments are capped as a percentage of income.

• The flat rate means that high-income borrowers tend to refinance into lower-rate private loans, while lower-income borrowers find the government loans relatively attractive. As a result, the percentage of borrowers on income-driven repayment plans rose from 20% in 2013 to 47% in 2022. Expect it to rise even further after this week.

The big picture: When governments privatize industries, one of the main reasons cited is to take pricing decisions out of the hands of politicians. They feel unable to raise prices themselves, so they sell off the franchise to someone who can.

• Nationalization is the same process but in reverse: It allows politicians to make pricing decisions, for better or for worse. Generally, those decisions are bad for the public fisc, but that doesn't mean they're bad as a matter of public policy.

Between the lines: One look at your broadband bill should suffice to persuade you that running utilities as private-sector monopolies isn't always good public policy.

• Even opponents of federal student-loan debt relief tend to stop short of waxing nostalgic about the years (roughly 2004 to 2009) when Sallie Mae was a private sector company.

The bottom line: National ownership does tend to mean cheaper prices — for better or worse.