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The Loan Industry’s Talking Points
With the U.S. House of Representatives poised to take up legislation that would eliminate the Federal Family Education Loan (FFEL) program and provide all federal student loans directly from the government, lawmakers opposed to the plan are coming armed with talking points straight from the student loan industry. Unfortunately for these legislators, many of the lenders' arguments against the Direct Loan program just don't stand up to scrutiny.
At Higher Ed Watch, we have expended a lot of ink (or at least a lot of blog space) over the last six months analyzing and critiquing the loan industry's arguments. In preparation for House floor action on the legislation, we thought it would be a good time to revisit some of the lenders' most dubious claims and to run excerpts from previous posts that responded to them.
Here are some of the arguments you're likely to hear and our take on them:
Argument: By proposing to provide federal student loans entirely through the Direct Lending (DL) program, the Obama administration and Democratic Congressional leaders are trying to "nationalize" or impose a "government takeover" of the federal student loan program.
Our Response: "We have news for the lenders: it is impossible to nationalize a government program. By definition, the FFEL program is already a nationalized program because it is a government program, just like direct lending...Sorry, lenders; it's a little late to complain about nationalization. Lyndon Johnson settled that fight a long time ago." (Can You Nationalize a Government Program?)
Argument: Having the government make all federal student loans directly will substantially increase the national debt.
Our Response: "When a lender makes a loan on behalf of the government in the FFEL program, the federal government is on the hook for 97 percent of the principal of the loan. So, essentially the risks and obligations to the taxpayer of both of those [FFEL and DL) loans are nearly identical. To suggest that somehow we don't have an increase to the national debt when the bank makes a loan that taxpayers are on the hook for is totally absurd."
"It's also important to remember in this debate that, according to the Office of Management and Budget, the Congressional Budget Office, and a lot of budget experts, the Direct Loan program is cheaper and, therefore, has less of an impact on the national debt." (Debunking Student Loan Industry Myths)
Argument: If the legislation is enacted and student loans are made entirely through the Direct Loan program, students will lose the fundamental right available in FFEL to choose their own lenders.
Our Response: "If there is anything that we learned from the "pay for play" student loan scandal, it is how little choice borrowers in the FFEL program actually have. Don't forget that in 2007, the Education Department found that one lender made at least 80 percent of students' federal loans at 921 participating colleges. That same year, the research firm Student Marketmeasure reported that 1,412 FFEL schools had one loan provider that made 80 percent of their students' federal loans, with 531 of those colleges recommending only a single lender to their students. What kind of a choice is that?"
"Perhaps the most hollow part of the ‘borrower choice' argument is the fact that a lender making FFEL loans is not allowed under program rules to significantly differentiate its product from other FFEL lenders. This is because all lenders must disperse Stafford loans and PLUS loans that have the same terms for borrowers, with only some room to offer slightly more generous interest rates than those required by law. Given that the loans are the same, why is borrower choice so important? It's really only important if you're a student loan company." (More Scare Tactics from the Student Loan Industry and Friends)
Argument: Using savings to end FFEL to increase spending on Pell Grants, rather than lowering the cost of borrowing for students, represents a redistribution of wealth that will ultimately harm middle-income students.
Our Response: "Given that the primary goal of federal financial aid policy is to increase access to college, it makes far more sense for the government to use the savings from lender subsidies to boost spending on Pell Grants than to "lower the costs of "federal student loans further."
"We haven't seen any evidence to suggest that reducing" the costs of federal "loans would have an impact on the college-going decisions of financially needy students."
"Besides, the proposals under consideration do seek to ease students' debt burden by making low-cost federal Perkins Loans more widely available so that students can avoid taking out more expensive and risky private loans." (Playing the Class Warfare Card)
Argument: Republicans should oppose the legislation because it "kills jobs and greatly expands the federal government's control of the education loan market.
Our Response: "The two federal student loan delivery systems (FFEL and Direct Loans) are part of the same government program that by law must provide loans with virtually identical terms to student borrowers. A move to 100 percent direct lending would certainly mean that fewer workers would be needed to run the program, even though all eligible students would continue to receive the same government loans they did before the change. In other words, fewer resources would be devoted to administering the same benefits provided by a government program."
"One would think that Congressional Republicans would champion this lower-cost, smaller-government approach. But this is not your father's (or your grandfather's) Republican Party...In their support for the FFEL program, it appears that House Republicans want big government too -- they just want to dress it up as private enterprise. Under FFEL, the federal government sets the terms of the loans while taxpayers insure private lenders against 100 percent of the interest rate risk, subsidize administrative costs, and cover all but a sliver of default losses on loans. How exactly does that arrangement make for smaller government than if the same loan were made directly from the Treasury?" (House Republicans Confused on Student Loan Debate)
Hopefully, we have added clarity to a debate that has been obscured by the loan industry's disingenuous claims.
Stay tuned tomorrow for more coverage of House action on this important legislation.
To the very end NAF, shills
To the very end NAF, shills for Democrats and the White House. At least you're consistent.
Incorrect point clarification
I just want to note that the author is factually incorrect on the "National debt" argument. Though the government is on the hook for 97% of the loans (as a form of insurance), this guarantee is treated as an off-budget expense and thus not currently counted as "debt," whereas the DL portfolio, by its nature, is an on-budget expense. On a side note, while the government may be on the hook for all of those FFELP loans, unless EVERYBODY were to default, that obligation amount is simply an incorrect reference point for debate. The real obligation is actual default payouts, which for the past decade have averaged about a 5.5 percent rate based on CDR data.
This is a classic case of torturing the data until it says what you want it to say.
The Loan Industry’s Talking Points-Get Real
Most of your arguments against the student loan industry's talking points are fundamentaly flawed. To say that the federal government is equally on the hook for FFEL or Direct loans is patently false and shows a lack of understanding of the fundamental differences between the programs. When FFEL loans are made with private capital, the burden on the U.S. Treasury is without doubt less.
For example if FFEL lender, Bank of x makes $100,000 in loans to ten students with private capital then the federal treasury is only exposed or "on the hook" for the amount that may or may not default. Historically the lender default rate has ranged from 5-10%. If you use a 10% default rate as an example, then one of the above ten students will default on his or her loan. The defaulted loan amount is $10,000. In this case, the treasury's "on the hook" or cash out amount is really only $9,700. The rest of the loans are performing and were made with private capital not taxpayer dollars.
If the same $100,000 in loans to same ten students was made by the Direct Loan Program, the treasury's on the hook amount is the full $100,000 which is all taxpayer dollars.
In any economic environment, wouldn't the taxpayers rather have more treasury funds available for appropriate government services?
Next, take a look at the real costs of the direct loan program and the estimated sources of revenue. The "savings" is coming purely from the low cost of borrowing that is currently available to the treasury and the low cost funds are coming from foreign soil. There will be a day of rekoning for the excessive borrowing. What will the feds do when the cost of funds increases on all these student loans and the margins are so squeezed that they no longer have the "savings" to muck about with. The mandatory spending on the Pell Grant Program and others will have to then be paid from other sources....Hmm, sounds like higher interest rates for borrowers or higher taxes from all of us.
Since the feds have tried to borrower their way out of financial trouble, even a modest rise in the cost of funds could have a disastrous effect, not only on student loans but on everything else. Does anyone remember the inflationary environment we lived through in the early 1980's? I remember 18% mortgages and CD's that were paying 10% or more.
The big three credit bureaus keep score on consumers through the FICO and other score methodologies. Oee of the biggest factors that hurts a consumer's score other than not making payments on time is excessive use of debt. I can't help but wonder what the United States Governments FICO score would look like after we add another TRILLION DOLLARS to the deficit so the federal government can make students loans with taxpayer dollars rather than private capital. If I as a consumer keep borrowing and borrowing someone will cut me off sooner or later.
in the past, the non-profit FFEL lenders have nearly all discounted their loans to students and some of them heavily. Many students were able to get FFEL Loans with out any upfront fees and with greatly reduced interest rates. The Direct Loan Program has NEVER really discounted loans to students and nor will it ever contemplate any of the innovative incentives that FFEL lenders have provided, especially if the earnings margin is the real source of the savings.
You guys are cute
Shows a stunning lack of financial literacy.
Under the current scenario (FFEL-DL) none of the FFEL loans have to be accounted for under the current debt window. Only if they were to fail would the debt window be necessary.
But all DL loans have to come out of the debt.
Yes, they get paid back over time, and in the long run the debt window becomes a non issue, but in the short-run the debt is a serious issue.
When this messed up bill passes, Arne Duncan needs to borrow 120 billion or so from Tim Geithner.
Arne promises that he'll pay back most of the money over 10, 20, or 30 years.
No money comes in the first year or second year. Very little money starts trickling six months after the start of the third year (for community college borrowers or post-graduate borrowers), then the fourth year more comes in, etc.
But in that first year it is all debt for the taxpayers.
In the second year it is all debt for the taxpayers.
In the third year it is almost all debt for the taxpayers.
Little Timmy Geithner doesn't have $120 billion sitting in a cookie jar (though you at NAF seem to think he does).
So he borrows that money to lend to Arne.
Timmy borrows it from Granny, by taking it from Social Security and giving her an IOU. Timmy borrows it from Gramps, by borrowing from Medicare. Then Timmy goes to the Saudis and the Chinese to see if they will lend him just a bit more.
So the debt is a real, and serious issue. Both short term and long term.
Beware Specious Financial Logic
Readers should be aware that by the logic presented in these comments, the entire federal debt could be eliminated overnight and billions of dollars could be saved. The line of reasoning presented here suggests that if private banks issue Treasury bonds on behalf of the federal government (with interest rate and default guarantees), the costs, risks and obligations borne by taxpayers for those bonds when issued by the Treasury somehow disappear. So, end the federal Treasury’s issuance of bonds and instead have private banks issue those very same bonds on behalf of the federal government with a full backing by federal taxpayers. Presto! The federal debt is gone -- or more accurately, hidden. Of course, all the risks, costs, and obligations of those bonds are still borne by taxpayers even though the bonds were issued by banks.
This is the kind of faulty logic that student loan lobbyists and their supporters have peddled for years.
Jason, can you cite one US
Jason, can you cite one US Government budget official or policy document that supports your "logic"?
I didn't think so.
Speaking of Faulty Logic
Where, in what anyone said did you infer that the obligation disappeared? What was said and very clearly explained is difference the two programs have on the treasury's cash position and outlay requirements. (Cash Accounting Anyone?)
Under the current FFEL model, does the treasury reserve 100% of the FFEL loan comittments against default? Of course not!
The fact remains that each and every Direct Loan made comes right out of the treasury, 100% in cash from the taxpayers. FFEL loans do not. This is indisputible.
Lets not forget that default expenses are partially offset by the upfront fees charged to the borrower in the form of Origination and Federal Default Fees. Both the DL and FFEL program charge these fees.
The difference between the two programs as discussed is the burden that the proposed all Direct Loan program would have on the treasury (taxpayers) and the federal governments inability to sustain it over the near and long term.
Yes Jason, show us some proof
I agree with Alex. Jason, please show us and your readers what kind of external support you have for the claims you make. The points we've raised are factual, not opinion based, so they should be straightforward to refute.
Jason, just because people disagree with you doesn't mean we're playing politics or have some ulterior motive. It could just mean that you're simply wrong.
Two questions regarding this plan
(1) What is the role of guarantor agencies when education lending becomes strictly FDL? Will they continue to receive 46 bps for servicing/processing? And in case of default, will they be insuring the loans for US taxpayers?
(2) I'm somewhat confused by the arguments by SLM and others. They should be happy we don't run these guys into the ground! Any chance anyone knows how much it COSTS SLM to service the loans we're giving them? If they earn something like 30-90bps, will they be able to eek out a living?
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