The Government "Fix" of the Student Loan Mess

Congress has decided to "fix" the student loan mess by purchasing those student loans that it guarantees against default (technically the guarantee is only for 90% of the default).  Direct government lending now accounts for only 22 percent or so of total student loans.  The argument is that the purchase money will go to banks who can make more loans.  There are multiple problems:  1) many lenders have left the market leaving only one -- the government chartered Salle Mae corporation.  Salle Mae has close to 80 percent of the guaranteed federal loan market.  Salle Mae is a) losing money and b) very poorly managed.  If Salle Mae continues to struggle we will have another call for a federal bailout. and 2) underappreciated, greatly underappreciated, is the problem the federal government will have managing a complex loan portfolio.  Guaranteeing loans is one thing, managing loans is another.  My guess is that the government will outsource the loans and pay a management fee to a company that the government does not monitor.  [E.g., Blackstone's job of handling the sub-prime loans picked up by the government in the government brokered Bear Stearns deal.]  This is not a solution folks.