Routing Around Government Pay Scales

I know, you’re expecting a post on the new compensation czar. But before commenting on that, I want to think a bit about the way in which Sallie Mae–once a GSE, now “fully privatized”–may amount to a de facto end-run around the usual pay scales for government work.

Back in May, Gail Collins editorialized on “the epicenter of the college loan strangeness,” guaranteed student loans. For such loans, she says, the following holds:

We the taxpayers pay the banks to make loans to students.

We the taxpayers then guarantee the loans so the banks won’t lose money if the students don’t pay.

We the taxpayers then buy back the loans from the banks so they can make more loans to students, for which we will then pay them more rewards.

As she noted in another column, “The White House believes that if it cuts out the middlemen, and just gives the loans to the students directly, it can save $94 billion over 10 years.”

Predictably, the middlemen have furiously lobbied to preserve their prerogatives. Sallie Mae has “hired two prominent lobbyists, Tony Podesta, whose brother, John, led the Obama transition, and Jamie S. Gorelick, a former deputy attorney general in the Clinton administration.” The lobbyists are to press the case that private lenders create value via “marketing, customer relations, billing, default prevention and collection of delinquent loans.” Collins counters that “The real competition among the lenders is not to win over students so much as the school financial aid officers . . . [leading to] thinly disguised bribes and kickbacks.” The Wall Streeting of higher education encourages such shenanigans.

I only have a couple of comments on the situation.

First, I have to wonder if we really can say that Sallie Mae has been fully privatized. All the guarantees it enjoys suggest a great deal of government intervention here. It spent $2,758,700 for lobbying “in the first half of 2007, and gave $572,000 to federal candidates in the 2006 election.” Though perhaps it’ll never be a state actor under what Michael Froomkin calls “our deeply twisted and narrow state action jurisprudence,” it seems more like an agency of the government (or perhaps a QUANGO?) than a contractor. Stephan Padfield gives several compelling reasons to think of such entities in this way.

So while Sallie Mae has many of the prerogatives of an agency, it can pay very high salaries to executives–such as the $13.2 million earned by its vice chair last year. Perhaps the ultimate rationale for keeping Sallie Mae around is to break the Procrustean bed of the Government Pay Scale. Do readers have any other rationales to offer? If it is superior to direct federal lending in “marketing, customer relations, billing, default prevention and collection of delinquent loans,” is that superiority worth $94 billion over 10 years? I think Chris Sagers’ article “The Myth of Privatization” (59 Admin. L. Rev. 37) suggests an answer to that question:

the basic choice in the organization of society is not between organization by government bureaucracy on one hand, and markets on the other–a choice that is assumed in the privatization literature. Rather, the basic choice is between two kinds of bureaucracy, which really do not differ much at all. Indeed, the chief difference seems to be that one of them lacks even a nominal obligation toward the public interest.

If the student loan status quo continues, Sagers’ pessimistic conclusion may well be warranted.*

*The pessimistic conclusion: “We have evolved to a state in which neither the individual franchise nor individual buying and selling decisions have any real significance at all, and all individual decisions are constrained by an astonishing array of restrictions set in ways that are neither democratic nor efficiently incentivized.”

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