To the dismay of Republican Members of the House of Representatives and Sallie Mae, President Bush's latest budget proposes to cut wasteful taxpayer subsidies to student loan providers and direct associated savings to increased grant aid. Bush's higher education budget embraces the triangulation tactic for which President Clinton was harshly criticized politically during his second term. The tactic, however, might lead to good policy and increased college affordability. Higher Ed Watch is optimistic.

How Bush is Triangulating Congressional Republicans and Sallie Mae

In the 2008 Budget released yesterday, the President included the deepest student loan bank subsidy cuts a Republican President has ever proposed. Higher Ed Watch thinks the President, who would use the subsidy cuts to pay for bigger Pell Grants for the most financially needy students, could have gone deeper. But still identifying over $18 billion in lender subsidies to be cut is nothing at which to sneeze.

Wall Street did more than sneeze. Student loan investors took a big hit yesterday after the Bush Administration's proposed budget cuts to lender subsidies were unveiled. Sallie Mae, for instance, saw its stock drop by 9 percent by the close of business yesterday. The company's Chairman, Al Lord, was spared some pain, though. He sold 400,000 shares a week before, according to the Washington Post. Hmm...

From a policy standpoint, most notable of the Bush proposed student loan bank cuts is a 50 basis point reduction (that's half of one percentage point) in the government guaranteed rate of return to college loan providers. Three weeks ago, the House, newly led by the Democratic Party, passed with an overwhelming 356 votes a 10 basis point cut in the lender guaranteed rate of return. But the House applied its cut only to the top 32 lenders of some 3,200 lenders.

Immediately after the House approved the interest-rate-cut bill, Higher Ed Watch predicted Senate Democrats led by Senator Kennedy would be more aggressive in going after excess lender subsidies based on the overwhelming House vote and our reading of the tea leaves. (Disclosure: Higher Ed Watch staff used to work for Kennedy.)

The House simply sought enough in savings to offset a phased-in reduction of borrower paid student loan interest rates. Kennedy would like to cut interest rates, increase loan forgiveness, and increase grant aid. That'll take deeper lender subsidy cuts. Yesterday, the White House hopped into his car on the road to increased college affordability.

The lenders, long partners to the Republican party, think they've been thrown "under the bus."  They're right.  In fact, Bush Administration officials  broadly dismissed the lenders' complaints yesterday.

Back in the 1990's, President Clinton tacked away from the liberal base of the Democratic Party when confronted with a new Republican Congressional Majority to make himself more relevant and show himself to be pragmatic. At least on higher education issues, President Bush is now doing the same with a new Democratic Congressional Majority.

Where are Congressional Republicans and Sallie Mae going to go now?

Higher Ed Watch staff already has heard from conservative Senate Republicans that they don't want to filibuster a bill that increases student aid and college affordability just to protect student loan bank subsidies. And never mind the conservatives, there are few endangered Republicans who want to take that risk.

So what are the lenders to do? Well, they can fight Bush and the Democrats and lose. Stick together and sink together. But the lenders, who can see triangulation as clearly as we do, in all likelihood are going to realize it's every man for himself. They're apt to try to carve out exceptions to the lender cuts (as the House did for the bottom 90% of loan holders).

There is an alternative, however. They can embrace a solution that introduces market forces into the loan program. We made a proposal on the op-ed page of the Washington Post yesterday to set student loan bank subsidies based on an auction.

An auction can be structured any number of ways. The lenders might want to grab onto the idea and try to at least help write the governing rules. Based on the reaction from Republicans that we got yesterday, the lenders would be wise to take the auction idea seriously.

Remember, it only takes two of three key groups of players to pass legislation that increases college affordability. Two of three.

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