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Remedial Math

College loans are a mess. Privatizing them would be worse

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Looking for a quick refresher course in math? Here's a fun word-problem for college grads: Check the amount of student-loan debt you owe the Pennsylvania Higher Education Assistance Association. Then figure out how many perks PHEAA could purchase with it.

For bonus points, decide whether state politicians are going to make things even worse.

All year long, reporters and politicians have been poring over financial records at the state-chartered agency. They've discovered out-of-control spending on executive bonuses, trips to spas, and even pom-poms for cheering on Penn State football.

Most recently, state Auditor General Jack Wagner found that PHEAA spent more than $100,000 taking agency employees to Hershey Park this summer. PHEAA also paid top brass $6.4 million in bonuses over three years. That money, Wagner's office notes, "could have provided 1,702 Pennsylvania students a maximum education grant."

Politicians have been busily professing their outrage. Our very own state Sen. Jan Orie (R-McCandless) has advocated a series of reforms, including tighter controls on PHEAA's board, which is made up largely of state legislators. "The point of PHEAA is to give educational opportunities, not to fill pockets of bureaucrats," she recently told KDKA.

Who can disagree? Not me. The Potter household's total college debt wouldn't quite pay to take PHEAA's staff to Hershey Park. It would, however, more than cover the agency's recent newspaper advertising campaign, "Why Does PHEAA Work?" (Answer: Because of hapless liberal-arts grads like those in the Potter household.) So screw those board members. Claw back those bonuses. Send me a check so I can start planning for my unborn children's tuition.

But Orie and other politicians are also talking about privatizing the agency. And that "reform" is probably the only thing that bothers me more than the behavior of PHEAA itself.

"If PHEAA is going to act like a private agency, let's privatize," growled Gov. Ed Rendell in the pages of the Pittsburgh Post-Gazette. As the paper noted, the idea isn't new: In 2005, PHEAA rejected a $1 billion takeover attempt by SLM Corp., a Virginia for-profit outfit commonly known as Sallie Mae. "Sallie Mae would have taken over most PHEAA operations ... while the $1 billion influx would have funded new student aid programs," the P-G burbled.

What the P-G didn't say is this: If you want to stop over-the-top compensation for executives, Sallie Mae are the last people you want running the show.

Thanks largely to PHEAA's dominant role here, Pennsylvania has been sheltered from SLM's rapaciousness. But the same year Sallie Mae generously offered to buy out PHEAA, it also granted its then-CEO, Albert Lord, nearly $230 million in stock options and other incentives. Using Wagner's formula, that bonus could have provided maximum-education grants to every student on Penn State's main campus, with money for pom-poms left over.

The only difference between public-sector graft and private-sector greed, perhaps, is how little public servants will settle for. Lord doesn't just take his friends out for expensive golf outings; he's literally building his own private 18-hole golf course. He doesn't just buy pom-poms; he's tried to buy an entire sports team, the Washington Nationals.

Yet even if Sallie Mae had acquired PHEAA back in 2005, I doubt Lord's excesses would have prompted such disgust from Harrisburg. In the view of privatizers, excessive compensation in the private sector is just the wisdom of the marketplace -- even though industries like student-loan financing rely heavily on government subsidy.

But while Orie and Rendell mutter about privatizing student loans, the rest of the country is going the opposite direction. Congress has been taking steps to rein in for-profit lenders, and a growing chorus is wondering whether we need loan companies in the first place. After all, most student loans are backed by the federal government, which offers billions a year in other subsidies. Running a firm like Sallie Mae is practically a license to print money.

"[T]ruly revamping the student-loan program will require renewed confidence in the ability of government programs to serve individuals," writes the New Yorker's James Surowiecki (who is certainly no socialist). And there is ample evidence to justify such faith: As Surowiecki notes, the GI Bill was "[a]n overwhelming success" at making college affordable for veterans. And it "involved no middlemen: the government paid tuition fees directly to colleges."

So if we can take away PHEAA's pom-poms, great. But let's not become cheerleaders for the private sector, where the excesses are much, much worse.

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