Anyone who still doubts that Obamacare would lead to a government-run health-care system should take a look at Obama’s plans for student loans. Those plans got a big boost this week when Rep. George Miller, the California Democrat who chairs the House Education Committee, introduced legislation to replace federally subsidized private lending with a government-run program, leaving only a sliver of student lending to the private sector and completing a journey to nationalization that began 44 years ago. Compromisers take note: This journey also involves a detour onto the “public option” turnpike.

In 1965, Congress created what became known as the “Stafford loan” as part of the Federal Family Education Loan Program (FFELP). Almost anyone who has attended college has heard of Stafford loans, and most people know that the federal government insures these loans against default risk — that is, the government reimburses the private lender for 97 to 99 percent of the loan’s value if the student defaults. What most people don’t know is that the government also protects lenders from interest-rate risk. Stafford loans are provided to students at a low fixed rate set by law. Fluctuations in commercial interest rates can expose banks to losses on these loans if their borrowing costs rise too high. So to smooth out their returns, the government pays the banks a subsidy when interest rates rise. Conversely, when rates fall below the Stafford rate, lenders must remit the difference to the government. Lenders are also guaranteed a percentage to cover administrative costs.

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FFELP was ostensibly designed to help students borrow money cheaply for college. For the first 25 years of its existence, conservatives complained that it led to tuition inflation by increasing demand for higher education, while liberals were more or less satisfied with it. Then, in the early 1990s, a change in federal budgeting rules forced Congress to set aside more money for the program, leaving less available to spend on other things. Lawmakers looking for a way around this problem found that, oddly enough, they could reduce FFELP’s budgetary impact by putting all the loans directly on the government’s books.

The Democrats argued that this would produce real savings by cutting out private-sector middlemen. In fact, the bulk of the projected savings were fictitious, resulting from the accounting change. To understand how this worked, consider the structure of the interest-rate insurance provided under FFELP. In exchange for insulation against interest-rate spikes, private lenders give up their ability to make windfall profits on student loans when their borrowing costs fall. The government doesn’t have to make that trade; if interest rates drop, it can keep all the profits. This means the Congressional Budget Office can use rosy interest-rate scenarios to project large savings.

Under these projections, “Treasury can charge 6.8 percent, borrow at 2 percent, and pocket the difference all day,” says Jason Delisle, director of the Federal Education Budget Project at the New America Foundation. Sounds good, but, as Delisle points out, this scenario hides the additional risk to the taxpayer that comes with putting all those loans on the government’s books. For government accounting purposes, that risk doesn’t exist, nor does the risk that Treasury’s borrowing costs might spike.

In 1993, the Democratic Congress made its move and created the Ford Direct Loan Program (FDLP). The initial plan was to have the FDLP take over all federally guaranteed student lending, but Republicans thwarted this move when they took control of Congress in the next year’s elections. The Clinton administration saved the FDLP by arguing that the existence of a “public option” for student lending would benefit consumers. In 1999 (the fifth anniversary of the program), Deputy Education Secretary Marshall Smith said, “Guaranteed lenders have responded to the Direct Loan Program by improving their service. . . . Students and schools are served by healthy competition in student loan programs, which has created marketplace incentives for both programs to improve.” Sound familiar?

Now that the government’s borrowing costs have fallen and the deficit has swelled, the Democrats have dropped the pretense of caring about consumer choice. “Healthy competition” is now a bad thing; their argument is that the FFELP should be eliminated and the “savings” spent elsewhere. Obama is brandishing the figure of $87 billion in savings over ten years, which he would use to expand the Pell Grant program. But, as noted above, the bulk of these savings will not materialize unless the CBO has accurately projected Treasury’s borrowing costs for the next ten years. The new plan “saves” the money FFELP spent to insure private lenders against risks — by assuming that those risks don’t exist.