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Monday, Jan 30, 2023
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Anti-Competitive Student Loan Plan Takes Historic Hit

Economist Adam Smith was not a proponent of free markets any more than Isaac Newton was a proponent of gravity.

Both of these groundbreaking scientists simply told us about these seminal forces and left us to figure out we would be pretty stupid to ignore them.

If 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 United 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.

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Reliance on free markets is not a partisan issue, but the fact is, Republicans are more sympathetic to the teachings of Smith than Democrats. That is why a recent Republican move to quash competition for student loan refinancing is so puzzling and why believers in the benefits of free markets who know about this action are so upset.

Republican legislation to kill competition for the 30 million people who hold student loans did not garner much attention , hardly a surprise since it happened during the holiday season on a Sunday at 3 a.m.

Most people were focused on how Congress raised interest rates on these federally guaranteed loans. But this action to restrict competition is potentially more far reaching, and more damaging to students and to efforts to reduce the federal 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, when you refinance them once, 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 disappeared. 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. They would either go out of business, or go to jail for price fixing or both.

Then Congress went one step further. Led by U.S. Rep. 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 controls in the early 1970s and made it worse. They effectively banned anyone from locking in low rates for longer terms.

The people at the largest student lender, Sallie Mae, were ecstatic. They beat 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 that if he could get rid of it 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 executive alone has received salary and bonuses of more than $200 million in the last five years.

Adam Smith did not have a problem with profits. Just the opposite: They are a signal for more competition and lower prices.


Ken Moser is a marketing consultant in Mira Mesa and an elected trustee of the San Diego Community College District.

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