Competition Is Good, Except When It Comes to Our Friends
for student loans hurts students and raises federal deficit
By Ken Moser
February 13, 2006
From the (Pennsylvania) Times News.
Economist Adam Smith was not a proponent of free markets, anymore than Isaac
Newton was a proponent of gravity. Both of these groundbreaking scientists
told us about these seminal forces, and left us to figure out we would be
stupid to ignore them.
If Adam Smith were here today and looked around the world, he would be happy
to know about the power of this theory: Free markets create free people. Free
people create prosperity. Pretty simple. And because it is practiced in the
States more than anywhere else in the world, it cannot be a coincidence that
we are also the freest and most prosperous nation in the world.
Reliance on free markets is not a partisan issue, but the fact is,
are more sympathetic to the teachings of Adam Smith than Democrats are.
That is why a recent Republican move to quash competition for student loan
is so puzzling and why believers in the benefits of free markets who know
this action are so upset.
Republican legislation to kill competition for the 30 million people who hold
student loans did not get that much attention. Which is hardly a surprise
it happened during the Holiday season on a Sunday morning at 3 a.m.
Most people were focused on how Congress raised interest rates on these
guaranteed loans. But this action to restrict competition is potentially more
far reaching, and more damaging to students and to efforts to reduce the
budget deficit. It happened two ways: First, Congress continued a law called
the Single Holder Rule, which says that once you have your student loans from
one company, you cannot change companies. Second, once your refinance them
you cannot do it again, no matter if a different company offers better rates,
longer terms or better service.
Earlier versions of the law outlawed the Single Holder Rule, but in the wee,
dark hours of that cold December morning that provision mysteriously
And along with it, any hope of competition, better rates, and better service
for the 30 million student loan holders.
Imagine if someone tried to get away with that in the home mortgage market.
would either go out of business, or go to jail for price fixing or both. Then
Congress went one step further. Led by Congressman John Boehner, then head of
the House Education Committee, Congress took the single most anti-competitive
provision in all of American law since the enactment of wage and price
in the early 70's, and made it worse. They effectively banned anyone from
in low rates for longer terms.
The people at the largest student lender, Sallie Mae, were ecstatic. They
their competition, not in the marketplace, but in the lobbying place. Sallie
Mae used to be a quasi-governmental agency, issuing the bonds that guarantee
the student loans. Then a few years ago, their chief executive figured out
if he could get rid of its to the federal government, but keep all the rules
that banned others from competing with it, that company would have a license
to print money.
This is what the experts say is the way it has turned out, with Fortune Magazine
calling Sallie Mae the second most profitable company in America. Its chief
alone has received salary and bonuses of more than $200 million over the last
Adam Smith did not have a problem with profits. Just the opposite: They are a
signal for more competition and lower prices. But Smith warned that when
creates barriers to competition, monopolistic profits would result and
What we have here today in the market for student loan
is a gross monopoly. Columnist Dick Morris calls the anti-refinancing scheme
an "obnoxious rip-off." Terry Savage, the financial columnist of TheStreet.com,
says there is "no way" borrowers should support this plan. The New York Times
calls it "Robbing Joe College to Pay Sallie Mae," the country's largest
loan provider. The Times Union of New York calls plans to outlaw refinancing
a "student loan shame."
Recently Fortune magazine documented how the largest student loan lender,
Mae, depends on Boehner to protect them from competition to ensure their
results. The Chronicle of Higher Education said the legislation is designed
to "force (Sallie Mae's competitors) out of the market.
With all the talk about reforms in Congress to deal with the influence of
no better example of this need could be cited than here. You see Congressman
Boehner has been the single largest recipient of donation from Sallie Mae. He
has received over $100,000! What a shame that he sold out college students so
Using government to quash competition was a trick Adam Smith was well
with. So he would not be surprised that Sallie Mae has unleashed an army of
to put its competition out of business. He would be surprised, however, that
we let them get away with it.
Ken Moser is Chair of the Adam Smith of California society. firstname.lastname@example.org