Don't You Miss the Good Old Days of Reagan and Clinton?

At the end of 2004, the direct cost of the S&L crisis to taxpayers was $124 billion, according to financial statements published by the Federal Deposit Insurance Corporation (FDIC), the successor to the FSLIC.

In the FFEL program, the federal government paid private banks to play middleman, and the banks loaned the money to students.

But the banks didn't come cheap. The government paid three different kinds of subsidies for the privilege of their involvement. Ostensibly, these subsidies were "necessary" to lure private banks into the middleman role. However, the amount of the subsidies was far more closely related to Congress's budgetary needs and banks' lobbying clout than any analysis of what level of incentive would trigger banks' participation. Indeed, at times lenders managed to steer legislation and continue to exploit extraordinarily favorable terms.

What subsidies did the government pay? First, it guaranteed the banks an interest rate, making "Special Allowance Payments" on top of the interest the student borrower pays whenever the student's rate is below a benchmark rate, which it was most of the time in normal economic conditions. Second, the government guaranteed nearly all the principal and interest on the loan, so the banks were insulated from losses. Third, the government paid guaranty agencies for various administrative services. (Despite the agencies' names, the funds guaranteeing the private loans came from the federal government.)

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In short, under FFEL, taxpayers guaranteed banks that student loans would be profitable and risk-free, and FFEL created a similarly risk-free, profitable role for guaranty agencies. The total extra cost to taxpayers for using FFEL instead of Direct Loans? About $11 per every $100 loaned.

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Finally, 45 years after the subsidies started -- and 20 years after the rationalized federal accounting revealed the subsidies' true cost -- FFEL has ended.