Proposal To Eliminate Government Subsidies Hammers Sallie Mae

Shares of student lender Sallie Mae (SLM) are down 42% this morning after the Obama Administration’s newly unveiled budget included a proposal to eliminate government subsidies paid to private banks who make student loans. The subsidies, which cost the government billions each year, would cut government spending by $47.5 billion over the next 10 years. Wall Street is outraged, claiming that getting rid of the subsidies will drown out private student lenders and increase the market for government loans (and therefore government involvement in our economy).

I’m confused. I thought we all want a free market capitalist system? If private student loans are unprofitable (and therefore require government subsidies in order for banks to offer them), wouldn’t the free market dictate that private student lending is not a worthy endeavor for private, profit-seeking banks? Maybe I’m missing the point, but I think reducing any government subsidy, and therefore the budget deficit, would be a good thing, especially for proponents of the free market.

As for the argument that this measure would virtually eliminate private student lending, I guess I’m not convinced. Given how creative and entrepreneurial our private industry is, do we really think they can’t come up with a student lending program that is both attractive to the borrower and also profitable for the lender? I have no doubt that the banks would love to keep getting these subsidies, but the notion that student lending in the private sector can’t be maintained without them seems a bit extreme, and even if that is the case, maybe private lending is a flawed model.

What do you think?

Full Disclosure: No position in Sallie Mae at the time of writing, but positions may change at any time

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5 Thoughts on “Proposal To Eliminate Government Subsidies Hammers Sallie Mae

  1. If they got rid of government loans too or charged market rates on them, then it’s be a free market.

  2. I despise Sallie Mae and I hope they go under. I hope all their upper management all suffer the same financial hardship they have put me through with their racketeer methods.

    I will be very happy to see sallie mae out of business.

  3. Chuck on May 24, 2009 at 8:57 PM said:

    SLM has been recently downgraded by Moody’s to below investment grade for their debt securities. At the same time the bond market & especially the junk bond & BBB bonds have rallied from their lows of last fall/winter. SLM Ed notes & Medium tern notes have traded as low as 20 cents on the $ for long maturities. Now around the high 40’s. It seems to me they provide an alternative to your non-blue chip equity holdings. I wonder how bad a credit they are at such steep discounts?

  4. Chad Brand on May 26, 2009 at 9:39 AM said:

    Chuck,
    I am with you on this one. I have been looking at their publicly traded senior notes, symbol JSM.

  5. You’re 100% right, eliminating these subsidies will not only promote the free market, they will help prevent the cost of college from rising. Colleges will have a harder time raising tuition knowing that their students will be unable to obtain any more funding. Obviously if Obama replaces these subsidies with government loans than that defeats the purpose.

    Fake Republicans on Wall Street love to complain about too much government for others and not enough for themselves.

    Real Republicans complain about too much government.

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