The Honeymoon is Over

Mr. Burd, exactly what would you have Mr. Day say and do?

And since when has not having "any special knowledge of markets," lending, auctions, or whatever kept the New America Foundation from popping off?

If one were to study the record, they would read the following about Mr. Day:

http://www.sfbg.com/entry.php?entry_id=5605

Editor's Note: This comment as originally submitted has been markedly truncated by our staff. Normally, we publish all comments without editorial change. However, when issues of legal liability arise in submitted comments, we edit accordingly.

While he was at The Chronicle of Higher Education, the author of this piece wrote many articles biased against FFEL and lenders. It became so obvious, he had to leave the Chronicle and was hired by New America, where his bias found a perfect match. Burd and others like him have no nuance--lenders are bad, direct lending good. Facts are irrelevant. Regarding state regulation of federal aid programs, Day and the association are taking the logical stand against the possibility of having 50 different sets of regulations under which their members would need to operate. They've never objected to federal regulation to accomplish the same results. But that not good enough for the anti-lender fascists. To them, slander and misrepresentation is but a weapon.

The DOE has admitted they can increase loan volume in the direct loan program by 100% - or 40% of the overall market. Therefore, 60% has to be provided by FFEL. Are you suggesting that lenders offer a program that is not profitable? How can anyone in business justify continuing to do business that way?

We need private lenders to participate. They provide better service and options for students. It should be about the students.

I am concerned with those who make a claim that "not one student has gone without a loan". Where this claim falls short is that most "all" students have lost many front and back end benefits of their FFEL loans. Bottom line on this is that students are paying more money for their loans than they were prior to this investigation (so who lost?). Based on government action and Attorney General Cuomo's actions, colleges are scrambling to find any lender who will still provide loans to their students. Many colleges have loan "electronic processes" that work best with the use of limited players who will work with that college's electronic process to deliver loan dollars to the students quickly and efficiently. Many of those cooperating lenders are "gone". Thanks to the damage done to the FFEL program, Mr. Cuomo would be hard pressed to criticize any preferred lender list, since it is an issue to just fine any lender.

Sure, his investigation found some very important issues that needed to be corrected. He will find that in any investigation of any industry. But, don't destroy that industry, just fix it. I feel concerned for all of those folks in the FFEL industry and their families who have lost their jobs and are now unemployed.

Direct Lending is not the answer for all, since the servicing of those loans does not include a decent default aversion program to keep students in repayment from defaulting. Maybe Cuomo should look into that!!!

Finally, in America, this free enterprise country, we have those who criticize companies (lenders) for wanting to make a profit... can you imagine that? Shame on those people for wanting to make a profit, after all, why do they want to stay in business.... the nerve!!!

E.

The comments show how desperate the arguments from the defenders of FFELP have become. If you want options and ‘choice,’ then get rid of both FFEL and DL. Sure gets the ‘gummint’ out of everyone’s hair. People deserve options in choosing a television, an accountant, a plumber, a credit card, a car loan, etc. As it stands, though, student lending is a social welfare program, part of the Great Society, and, as long as students can gain access to loan capital, there is no “constitutional right” to have any type of choice of lender. Do you get to choose “Jane’s social security” vs. “Bob’s social security"? What about “Frank’s food stamp program” as compared to “Carol’s food stamp program"?

Furthermore, there should be no choice (and is none in law) of different program features ("options"?) -- terms, conditions, benefits -- for different students. This is a national program. Futhermore, it would be unnecessarily costly for lenders to do so. These myths of students negotiating different FFELP loan features from their dorm mates are "urban legends." At most there are different features by school (in some cases based in part on the school's cohort default rate), and students at a top 5 business school may get a slightly different loan from the ordinary undergraduate college.

The level of customer service, technology, standardization, etc., in FFEL, was abysmal before DL was started. For example WSJ/Smart Money, March 1996 ("Bureaucratic bumbling. Antiquated computer systems gone wild. Misplaced paperwork. Thuggish collection agencies. It’s just another day in the student-loan business.") Who’s to say it won’t return to that crisis situation after DL is gone? Lenders and schools faced a turning point in the early 1990s. They could have admitted their abysmal failure in delivering and servicing student loans, entered the Twelve Step Program, supported serious GSL reforms, and completely avoided the creation of DL. Instead, they decided to pursue the lobbying route, trying to defeat the DL idea legislatively rather than substantively. As a result of this strategic error, they almost lost the whole FFEL program. The same thing is happening again; for example, what would SLM and NNI do if they stopped making students loans? What line of business would they pursue? It is possible they could simply collect on the old ones for 30 years. It sounds like there are still many out there who are willing to roll the dice again on Beltway gamesmanship instead of admitting their significant shortcomings. And, by the way, which other countries have succeeded with guaranteed student lending programs? Maybe the problem was using the feckless Ed Dept instead of some other agency for handling student loans. People tend to sit up and take the IRS more seriously. In Australia the student loans are collected via payroll deduction and the national tax agency. In any case, the default rates in the USA are surprisingly low -- except for the small percentage of consolidation borrowers who have already defaulted on their FFELP Staffords prior to consolidating; if a borrower who has defaulted once is more likely to default again this is not rocket science, it is politics.

The FFELP model does not offer the transparency that Americans demand in 2008. The typical loan provider does business under several names and provides no audited financial data to students, parents, schools, or the SEC. Most of the time customers can’t even tell whether they are dealing with a marketer, a lender, a loan servicer, a financier, a web portal, a loan holder, a guaranty agency, a guarantor servicer or a secondary marketer. Often they are pretended to be part of the govt. DL, on the other hand, is audited year-in, year-out by many agencies and companies.

There were no FFELP “borrower benefits” until DL provided failing lenders with an incentive for self-preservation in the 1990s. Even then, the benefits were minimal until GAs started waiving the guaranty fee in 1998. This was federal money, so no sweat to not collect it from borrowers. Then, when DL offered borrower benefits authorized under the hea, the FFELP associations and organizations sued to prevent borrowers from receiving benefits. Now, years later, FFELP lobbyists are suddenly in favor of borrower benefits?

Under the secondary-market model, the terms, benefits and conditions of your FFELP loans (both pre-CCRAAA and post-CCRAA) depend on where you live, where you go to school and, possibly, what type of degree you are seeking. What ever happened to a national loan program? Through all the marketing and misdirection, maybe 1% of FFELP borrowers qualify for some discounts. For only a few months 20 years ago were FFELP lenders allowed to use credit scoring of individual students to issue loans. However, methods somewhat similar are used to today — not on whether to issue the loan itself, but on whether and how much to offer on borrower benefits. Thus, some of the lender and guarantor subsidies are directed away from “undeserving borrowers” and towards the “deserving borrowers.” Not an efficient system at all.

CCRAA has provided a great service by moving the nation back towards a single set of terms, conditions and benefits. DRA started us on that road by putting the programs on a schedule to eliminate borrower fees, for the first time in 30 years. CCRAA added a bunch of additional borrower-friendly features. By 2112 you won't have to be attending a school that uses one of the handful of state government lenders that provide zero-fee loans to have access to reduced loan fees. Lenders may complain, but CCRAA brings borrowers back to normalcy and shows you don't have to pay lenders tens of billions of dollars to beg them to provide the tiny features available before. Would you rather have 0.25% interest reduction for automatic debit applied during your last month or two of repayment, or would you rather have a zero fee loan? Sounds like an easy choice.

Anyone whose sensitive soul is offended by the power grabs of political appointees would have to say that both FFEL and DL should be completely repealed. The power grabs of unelected appointees have been far greater in FFEL. "Exceptional performer" went overnight from an aged HEA provision which no servicers nor holders could qualify for and which had never even been regulated to a nearly universal program-wide means to increase lender profitability -- without going through the Congress at all. "9.5" was used during a low-interest-rate environment as a means to greatly increase the yield of the politically-powerful state lenders, despite Congress's letter of the law that only where there was a connection to a pre-1993 bond would a student loan qualify for Uncle Sam's guaranteeing the loan holder a minimum 9.5% yield. The "Deficit Reduction Act" banned re-consolidations by borrowers. That is, until the guarantors complained to the politicals. As a result, despite the letter of the law, they will still re-consolidate defaulted FFEL consolidation loans into DL to get them off the books of the guarantors which also counts as a successful collection for them . . . There are many, many other examples.

Direct lending has the best guarantee of service that money can buy -- a Congressman's call to the Secretary of Education when a college is not getting its students' money in a timely manner or when a constituent borrower is not being well served. You can bet they "hop to it" when that occurs.

If DL is not "permitted" by the Constitution, then neither is FFEL. There is no legal, constitutional or substantive difference. The only difference that advocates seem to argue is that FFEL creates "jobs" in almost every state, while DL only creates jobs in the states where there are competitively-issued contracts. Another argument was made that the loads of "employees" of FFEL lenders, guarantors, secondaries, servicers, etc., pay lots of taxes; well, they carefully neglected the taxes paid by federal contractors' employees. And why does Sallie need 12,000 employees to handle a portfolio about the size of DL when DL can get by with 95 percent fewer employees. Why the inefficiency? Because FFEL is even less "free market" than DL.

Without the New Deal, less than five percent of American households would own their own home. I guess it has been so long that the average American has been leaning on the government in part for their success in life that they have forgotten. There is an arrogance when people say they have made it on their own. They simply haven't. And couldn't. Everyone seems to assume that they would be the one who would "win" under caveman rule when the government is abolished. Most likely you would be the one whose wife and property would be snatched by a powerful neighborhood warlord, once the government were no longer around. It was the activist judges who found a non-existent "right to contract" to use as a means to delay even minor workplace protections from the 1890s to the 1930s. And, unless you want a federal subsidy paid out every time a woman asserts her right to choose, then no, there is no relation to "choice" in student loans, because in that case American taxpayers who are not in college and do not have children in college are being requested (in essentially a shake-down) to pay for huge taxpayer subsidies in an effort to provide a choice of lender.

Social Security is a New Deal program. Strange that anyone would admit that FFELP is as insolvent and untenable in the long-term as Medicare and Social Security. In contrast to Social Security, which will continue in one form or another, one Depression-era financial industry reform which was shortsightedly repealed in 1999 was the Glass-Steagall Act. In simplest terms, Glass-Steagall put up an iron wall between commercial banking and investment banking. Many economists have blamed the Gramm-Leach-Bliley Act of 1999, which repealed Glass-Steagall for the sub-prime mortgage debacle, the ABS collapse and the muni bond pull-back, in other words, several things which ironically have limited the ability of FFELP to continue.

Like Seabiscuit, direct lending has been weighted down by Congressional and Executive branch "features" and the results of lobbying by its competitors with all sorts of disadvantages. Like Seabiscuit, who, as a horse could not speak out, direct lending has been prevented from responding. For example, despite Smoky the Bear, Express Mail, and "be all you can be," there is a myth that it would be "wrong" for direct lending to market, to visit certain schools and make a case for switching to DL. Or to use targeted mailing/emailing/phone campaigns to go after the most creditworthy potential consolidation borrowers. Or to fight back in the media against some of the more egregious statements from so-called competitors. Amazingly, though, because of the stubborn commitment of most of the original schools, this has led to higher quality loans in DL. Not so amazingly, this in turn led to "pilfering" of these borrowers through consolidation.

If you were a stock holder, you would want the company you invested in to fight back; these are your assets, after all. But, wait a minute! You are a stockholder in dl: if you live in the USA you are a taxpayer, and the future years' of revenue from those assets are lost if they prepay by consolidating out. The bottom line is there was massive coercion related to ffel -- read "The Bill". Schools, particularly community colleges and hbcus, were given false information about how complex and difficult it would be for them to run the dl program. Why even try when a lender or guarantor will do it for you (now considered a prohibited inducement though). Read Phil Schrag's publication on income-contingent repayment which details the false stories spread by lenders in the financial aid offices about how borrowers would unfairly pay more interest, while at the same time they were consolidating borrowers into 30yr repay plans. What makes you think that financial aid offices are about borrower benefits or have the time or use this as any type of criteria in choosing a lender? Not a priority there; it is about the workload - the priority is keeping the trains running; they especially don't worry about what "ex-students" long out of school are doing; there is a new crop of students every few months. The bottom line is that a lot of schools continued to stay in dl despite no encouragement from the commmunity, the feds, or even their own upper management, and if dl had been allowed to do even five percent of the marketing/"outreach" of the ffel community, then almost all of the schools would be in dl.