A Chequer-Board of Nights and Days

From today's Wall Street Journal Political Diary (subscription required), comes the latest example of how government assistance is no assistance at all, courtesy of Brendan Miniter. As people will recall, upon taking control of Congress, the Democrats promised to make college "more affordable" and passed laws to cap interest rates to do so.

The result of all this do-goodism?

By one count, some four-dozen student lenders have either curtailed loans to students in recent months or closed up shop entirely. Sallie Mae, the biggest, rolled out its Chief Executive Al Lord yesterday to warn of a "train wreck" in the $85 billion student loan market without a federal bailout.

The broader credit crunch is certainly playing a role, but Mr. Lord laid most of the blame on a Democrat-sponsored law that took effect in October. As part of her "First 100 Hours" agenda, Ms. Pelosi and Co. slashed interest rates banks can charge students in half to 3.4%, leaving Uncle Sam to make up the difference. Democrats also pushed through cuts to the fees the federal government pays to banks for underwriting student loans. "It's not even a matter of break-even. [The lenders] lose money on these loans if they originate them," one financial analyst told Dow Jones Newswires last month.

The Federal Family Education Loan Program likes to boast that it's now the dominant source of college loan funding, making "it possible for borrowers with no income, credit history, cosigner or collateral to get student loans at low interest rates." Talk about subprime. All this federal money is also a substantial reason for the rapid inflation in tuition costs. Every Congressionally-created problem must have a Congressional solution. Pelosi ally Rep. Mike Miller, chairman of the House Education and Workforce Committee, is now pushing legislation through that will both lift the cap on federally subsidized student loans and expand Uncle Sam's direct loan program -- completing Washington's takeover of the business and no doubt setting the stage for bigger meltdowns ahead.

Congress has succeeded in making the student loan business less profitable. It did not think about the consequences of this, of course, but it should now see--if there is any wit on Capitol Hill--that when you make a business less profitable via government fiat, you decrease the incentives for that business to continue in its previous robust fashion--if at all.

Et voilà, that is precisely what we are seeing. Student loan lenders can't make as much of a profit thanks to the caps on the interest rates they charge. As a result--especially given the current credit crunch--they are scaling back their activities or cutting out of the student loan business altogether. And this only serves to harm students.

Nice work, Congress. What do you do for an encore? Have Speaker Pelosi start brush fires in California?