Higher Ed Watch - logo

Hidden in the Stimulus Bill

Last December Higher Ed Watch caught wind of back-room maneuvering on Capitol Hill to retroactively change the way the federal government sets lender subsidies in the guaranteed student loan program. Education Secretary Margaret Spellings sent a letter to key members of Congress asking them to quickly enact legislation to change the index used to determine the quarterly interest rate subsidy paid to lenders. The change would calculate the subsidy based on LIBOR instead of commercial paper

No action was taken...until now. The stimulus bill released today by the U.S House of Representatives Appropriations Committee would make the change. Specifically, it would recalculate the subsidy for last financial quarter (October through December 2008) owed to private lenders. And the change would also apply to all loans issued since 2000.

According to our estimates, the change would retroactively increase the subsidy paid to lenders by about 0.50 percentage points. Multiply that across hundreds of billions of dollars in outstanding loans and the extra payments could reach into hundreds of millions. Strangely, the Appropriations Committee reports that the cost will be only $10 million.

In our earlier post, we did not oppose the change, especially given the break down in the commercial paper markets. However, we expressed concern that the change sought by the Secretary (and the student loan industry) was being debated out of the public eye. For example,  while the Department of Education regularly publishes on its website important policy letters the Secretary sends to lawmakers, this particular letter is suspiciously absent from the site. We also noted that the proposed changes would be unprecedented, as loan subsidy changes have always applied to new loans, not previously issued loans. We argued that such a proposed change should be thoroughly and publicly debated by Congress, not buried in a huge omnibus, must-pass bill.

Well, it looks like our concerns were warranted, as the change is tucked away in a 258-page stimulus bill. Readers will note that the subsidy change is not touted in any of the press materials released by the House Appropriations Committee.

As we wrote in our earlier post, the index issue and proposed changes are a dangerous symptom of the guaranteed student loan program disease. To get private lenders to make loans under the program, Congress must adequately compensate them. Yet Congress is not skilled at setting a payment rate that is neither too high nor too low, or that encourages the optimal number of lenders to make loans to all students. Worse yet, Congressional subsidy setting is subject to dangerous amounts of influence by student loan company lobbyists. This is particularly true when the issues are steeped in financial complexity, such as yield spreads between commercial paper and LIBOR, or interest rate swaps and asset backed securities.

The index issue should serve as an important reminder to Congress and the incoming Obama administration that they must adopt a system for setting lender subsidies that does not rely on continuous, ad-hoc legislative tinkering and loan industry lobbying. An auction where lenders bid for loan volume or subsidy payments is the best way to avert loan subsidy inefficiencies, crises, and lobbying bonanzas.


Curious how you came up with a 50bp increase for lenders? Historically hasn't the 3-month LIBOR & CP rate trade in relation to each other with 3-month LIBOR higher by about 10-15bps? This quarter there was a huge disconnect between these two rates due to the government interaction to credit crisis, which drove down CP rates to extremely low levels while LIBOR remained high. Isn't this the reason why they are also going to change the basis to 3-month LIBOR minus 13bps to account for this historical difference? I don't see how this rate should be historically any different & be a net benefit to the lenders?

Also the reason for including all post-2000 loans are because all loans prior to that date were based on T-Bill.

Under no conditions can those rates be retroactive

Anyone who allows Spelling, of all political appointees, to negotiate retroactive rates is a fool, particularly with a new Secretary in the wings. She is the one who recruited the University of Phoenix's staffer to raid, and bankrupt, the entire system of higher ed loans. With the highest default rates for the least supported kind of online higher ed, that ought to be more than enough to freeze her out of this decision, even without a new Secretary pending. The embarrassing courtship of former Governor Weld by another of those proprietary, and extortionate, institutions should be enough to alert even the Republicans on that committee.

Retroactive Rates?

I wouldn't exactly consider this changing the rates retroactively, now if Spellings tried to change the SAP spread, that would be a different story. But changing the basis to a rate that makes more sense to the financial industry should be a no-brainer, especially since they are pricing in the historical difference between the two rates. It's not like the government is going to go all the way back to 2000 & pay according to the new method, even if they did, Lenders would probably end up owing more money back to the government (I didn't calculate the historical spread between the two rates since 2000). And don't you think the new administration is involved in this since it is in their bill to stimulate the economy?

"Back-Room Maneuvering" or More Spin from New America?

Jason: As a former congressional staffer, I’m sure you’ve drafted a number of letters to various administration officials and committee chairmen. Are you suggesting that any letter sent but not posted to a Web site should be considered “back-room maneuvering”?

To be clear, for a back-room deal to take place, at least two parties must be involved. Based on your latest conspiracy theory, I guess we I have to assume that Chairmen Miller and Kennedy were either hoodwinked or paid off regarding this proposal, which you claim was “hidden” in the stimulus bill. That seems like a pretty remarkable assertion. It’s also remarkable that you fail to mention that this so called “hidden” fix is temporary.

P.S. The stimulus bill also includes $50 million for student aid administration to help with the FFELP liquidity programs and to service the surge in the direct loan program. Was this publicly debated? Who came up with the $50 million figure? Should it be more, or less? Is New America concerned there weren’t any letters posted to Web sites on this issue?