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Exclusive: Non-Profit Lenders Seek No-Bid Contract and Entitlement

June 25, 2009 - 4:00pm

What if a defense company was secretly working the back halls of Congress to secure a no-bid contract to build a fighter jet? Or what if a handful of non-profit health insurers were lobbying Congress to divide up the country and grant them legislatively guaranteed monopolies to manage government health benefits? The public would surely be outraged. Yet a trade association for non-profit student loan providers, the Education Finance Council (EFC), has taken a similar approach with its proposed alternative to federal student loan reform under consideration in Congress.

This week Higher Ed Watch received from an anonymous source a copy of the proposal EFC has been shopping to a select group of Congressional offices. EFC confirmed it had crafted the proposal sent to us, but the association has not publicly released it, nor does it mention it on its website.

In its proposal, EFC calls on Congress to guarantee that all currently operating non-profit loan companies and servicers (such as a few guaranty agencies) will be given the servicing rights for a minimum number of federal student loan borrowers attending an institution in their home state. The proposal defines this minimum level as either 100,000 or the total number of borrowers within the state, whichever is less. Thus the proposal seems to suggest that borrowers would be assigned a non-profit loan servicer by the federal government. Has EFC compromised on its key loan program principles - competition and borrower choice - to guarantee its members a role in a new loan program?

Peter Warren, EFC's president, defended the group's plan in an e-mail to Higher Ed Watch, writing "there is certainly no less choice here" than under the administration's plan, which would provide contracts to a handful of companies to service all future federal student loans. (The Department recently awarded contracts to four companies, including Sallie Mae and the non-profit Pennsylvania Higher Education Assistance Agency to service loans that lenders have sold to the government under the Ensuring Continued Access to Student Loan Act.) He added that the proposal would allow other companies to compete for servicing business in states in which there are more than 100,000 borrowers.

While the Obama administration's plan would also assign borrowers a servicer, it at least requires that servicers compete in a bidding process to win a contract. No such competitive bidding takes place under the EFC plan: it is a no-bid contract. EFC includes a competitive bidding gesture in is proposal, stating that compensation under the guaranteed contract would be set by the Department of Education using "market-based rates."

The second component of EFC's proposal is a new federal entitlement for non-profit servicers to provide college outreach activities to students. Loan servicers would receive $10 for each student enrolled in an institution of higher education in the state in the previous academic year. Servicers in small states would collectively be guaranteed a minimum of $2.5 million. Again, the EFC proposal jettisons competition in favor of a politically-determined guaranteed payment stream from the federal government.

Warren argues that this aspect of the proposal is appropriate because "the non-profit lenders are the ones who are currently carrying out these outreach activities, have vast experience in doing so, and have successful programs in place that should not be summarily discontinued."

But non-profit lenders are hardly the only entities carrying out these types of activities. At Higher Ed Watch, we believe borrowers and students would be far better served by entities that won competitively awarded grants to provide financial literacy, college preparation, and college access programs.

As Congress considers student loan reform in the coming weeks, non-profit lenders and guarantee agencies will continue to flex their political muscle. But lawmakers should put good policy ahead of politics and see the EFC proposal for what it really is.

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EFC Outreach and Servicing Language.pdf290.38 KB

Close the back door

Jason Delisle and Higher Ed Watch deserve great thanks for bringing to light the EFC "plot" to ensure that their statutory profits continue. Congress should not fall for this blatant attempt to circumvent the intent of student loan reform that seeks to have all work performed be paid for through a competitively-let bidding process. No one should let the words "non-profit" bring a sense of security to any plan. The news has been full of scandals for years involving many non-profits as well as for-profits within the FFELP industry. Such guarantees sought by EFC are inappropriate and unnecessary to a well-run federal student loan program. Jason Delisle's commentary should be required reading for every member of Congress and his/her staff!

Non-profit Jargon

I agree with the first commenter. Look at all the improper inducements the Kentucky non-profit agency made to borrowers regarding a loan forgiveness program, Best in Class. Higher Ed Watch has done a great job at exposing that particular agency and hopefully borrowers will receive what they were originally promised from KHEAA.

How do the scholars at the NAF do it folks...

"Or what if a handful of non-profit health insurers were lobbying Congress to divide up the country and grant them legislatively guaranteed monopolies to manage government health benefits? The public would surely be outraged."--Jason Delisle

Gee Jason, is the "public surely going to be outraged" when Congress "divides up the country" and grants itself legislatively a guaranteed monopoly to manage the bulk of student lending?

Remarkable

This isn't surprising. Many of these non-profits are the least efficient players in the student loan program, which is confirmed by this proposal to inoculate themselves from competition. If, as they often claim, these entities provide student benefits that other lenders don't (usually financed with tax-exempt funds bestowed on them by the state and taxpayers), then why with these advantages are they afraid of competition?

The answer can be found in the recent articles by New York Times reporter Jonathan Glater:

http://www.nytimes.com/2009/05/27/your-money/student-loans/27forgive.htm....

The so-called benefits promised to borrowers by these entities aren't materializing. It takes incredible audacity for these entities to ask for special status even a legislative monopoly in smaller states and a new politically determined subsidy for "college outreach services".

Any member of Congress who supports this particular proposal, or anything akin to it, will have some serious explaining to do.

Political Survival (Death)

It's been said that politics makes strange bed fellows. That's a perfect way to describe EFC's political survival strategy. But the strategy won't work because it is being designed and administered by two Republicans, which is one reason it rings so hollow.

EFC is led by two former GOP congressional staffers, one who just joined the association from the Bush Administration's Department of Education. In fact, Direct Loan program oversight is one of the things touted in Peter Warren's bio on the association's web site: "From 1998 – 2000, he was a [GOP] professional staff member for the House Committee on Education and the Workforce, where his portfolio included oversight of direct lending."

Now the group wants to latch on to the Direct Loan program in a frantic attempt for survival.

If the proposal could stand on the merits it may not matter as much that two Republicans are trying to convince Democrats that government protectionism is needed here, but the proposal doesn't have a chance to stand up to scrutiny or open debate.

The only thing the Republican leadership of EFC had right was its attempt to keep the proposal secret. This is an obvious case of poor Washington representation. If you were part of a group that has traditionally heralded the benefits of private sector competition, would you rely on two Republicans to implement a stealth strategy based on a government handout from a Democratic Congress and President?

It sure would be entertaining to be a fly on the wall in the Democratic offices after EFC's Republicans make their visits. Are they serious?!! must be the immediate reaction after they are politely shown the exit.

It's not a 'Republican idea' to include non-profits

President Obama yesterday in speaking to a non-profit in NH, recognized the need to include the private sector in solving problems. He states, "So if anyone out there is waiting for government to solve all their problems, they're going to be disappointed. Because ultimately, the best solutions don't come from the top-down, not from Washington; they come from the bottom-up in each and everyone one of our communities."

Non-profit lenders currently support the only college access programs in many states and if it is not the only one, they are often producing the best results that are most likely to provide a good return on our taxpayer dollars.

As the President's team looks for the 'hidden gems' in communities, they could easily discover this valuable resource, the not-for-profit companies (currently funded by student loans) providing college access. To have EFC fight to preserve college access (with or without loans)speaks directly to our President's desire to include non-profits in the solutions.

He stated, "The lesson I learned then still holds true today: that folks who are struggling don't simply need more government bureaucracy; that top-down, one-size-fits-all program usually doesn't end up fitting anybody. People don't need somebody out in Washington to tell them how to solve their problems, especially when the best solutions are often right there in their own neighborhoods, just waiting to be discovered."