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Getting the Facts Straight on the PLUS Loan Auction

At Higher Ed Watch, we hate to see journalists get played by the student loan industry. But that's just what happened last week when two well-respected national publications -- The Wall Street Journal and The Chronicle of Higher Education -- ran articles in which they mischaracterized the upcoming PLUS Loan Auction, a program that private lenders and some groups representing financial aid administrators oppose.

Reporting on efforts by the National Association of Student Financial Aid Administrators to delay implementation of the auction program, the two newspapers claimed that the auction was designed to cut federal subsidies for private lenders ("Schools Seek Delay in Move to Cut Subsidies to Student Lenders," the Wall Street Journal proclaimed). This assertion echoes the loan industry's talking points and is just plain wrong. In fact, the auction allows for a subsidy increase for lenders making PLUS loans.

In 2007, Congress created the new auction program to determine student loan subsidy rates for private lenders making federal PLUS loans to parents. The auction replaces a system that allows Congress to set the subsidy rate through political negotiations. The first auction is set to begin this April, and applies to all parent PLUS loans made in the 2009-10 and 2010-11 academic years.

The PLUS loan auction requires that the quarterly interest rate subsidy guaranteed lenders under the FFEL program structure be no higher than the rate now set in law (3-month commercial paper + 1.79). In other words, lenders may receive the same interest rate subsidy on a PLUS loan under the auction as they do now - they just have to bid at that rate.

At the same time, the auction makes two key changes to current law that would result in lenders receiving larger subsidies than today.

First, loan companies that win the auction will no longer have to pay the U.S. Department of Education a fee equal to one percent of the principal value of the loan upon origination, as PLUS loan providers currently do.

Second, the loans made under the PLUS auction will carry a 99 percent guarantee. Under the current program, PLUS loans carry a 97 percent federal guarantee against default losses for lenders. That's a big increase in the federal subsidy... according to the logic used by lenders. Those who follow the industry closely will recall that when some in Congress proposed reducing the federal guarantee on all FFEL loans in 2007, lenders vehemently opposed such changes, arguing that even small changes in the guarantee rate have big effects on the value of the loan.

Interest Rate Subsidy Cut is Voluntary

If lenders can get the same interest rate subsidy under the PLUS loan auction, but pay less fees to the federal government and are granted a higher (99 versus 97 percent) guarantee against default losses, how on earth can the program be characterized as cutting subsidies? The only way subsidies would be cut under the PLUS loan auction is if lenders submit bids lower than the 1.79 percentage point cap. Perhaps some lenders will, and perhaps some won't. We won't know until the bids are in.

But that's not the story that the loan industry wants you to hear. Unfortunately, reporters at The Wall Street Journal and The Chronicle of Higher Education took the bait. Hopefully, they'll be more careful in the future.


How to make student aid packaging more complicated

Its fun to play with ideas and we know of no other intellectual sandbox that has attracted more "policymakers" than student loans. The PLUS auction is a prime example of "policymaking" run amuk. It indisputably makes student loans more complicated and on its face makes no sense whatsoever, especially now that the President has proposed eliminating the FFEL program.

The author of this piece continues his fight to defend this bad idea. He is indifferent to the fact that aid administrators universally hate the idea.

The author also plays fast and loose with the facts. He knows--because he was a Congressional aide at the time--that the PLUS auction was "scored" by the Congressional Budget Office to produce millions in savings--that's one reason it was enacted and is the prime reason why Congress has been unable to repeal it. Where does the author think those "savings" were going to come from? Why was the auction, which was described as bringing market forces to determining the appropriate subsidy level structured to prevent bids that would have increased lender return above the levels set for PLUS loans in the Higher Education Act.

Ideas can be a dangerous thing when the real world impact they can have is disregarded by "policymakers" more interested in playing with ideas than in helping students get into and suceed in college.