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End it or Mend it?: A New America Debate on FFEL's Future
Should the Federal Family Education Loan (FFEL) program be mended or ended? That was the subject of debate at an event on Tuesday hosted by the New America Foundation's Education Policy Program.
On one side was Robert Shireman, a senior advisor at the U.S. Department of Education, who helped write the Obama administration's plan to sunset the FFEL program and use the savings to turn the Pell Grant program into a true entitlement for low-income students by financing it entirely through mandatory funding. The recent turmoil in the financial markets, he said, has exposed the risks that the federal government takes on by relying on private lenders to make government-backed loans to students. Without federal intervention, the whole program could have collapsed. "It's not a system that assures that the loans are actually made," he stated.
On the other side were representatives of the student loan industry, who urged the administration to abandon the proposal, which they said would be harmful to students, and instead work with them to reform the program. "I do believe the administration is approaching this from a sincere belief that they want to do the right thing and lenders, for the most part, don't disagree with what the administration is trying to accomplish," said Scott Fleming, director of the Chartwell Education Group, a lobbying firm that has represented lenders. "It's simply that we disagree with how they put it in practice."
The industry representatives said they were trying to find "a third way," between maintaining the status quo and ending the program. But they acknowledged the hurdles of getting all the different types of players in the FFEL program to agree on an alternative plan.
"It's going to be very difficult to get lenders and guarantors for that matter into some kind of agreement as to what it should be, public not for profit lenders, private sector lenders and so on," said Paul Combe, president and chief executive officer of the student loan guaranty agency American Student Assistance. "It will take leadership, and I think that's the point where it is an opportunity for the administration to take that leadership role and actually open up a dialogue."
Shireman did not rule out considering other proposals, but he said that they would have to bring significant cost savings to the government and provide loan serving companies with the proper incentives to prevent borrowers from defaulting on their loans.
Jason Delisle, the research director of New America's Education Policy Program, expressed skepticism over the loan industry's willingness to change its ways. Any serious reform would have to take Congress out of the business of setting lender subsidies, he said. Given the loan industry's "incredible opposition" to the PLUS Loan auction program, he said he would be "surprised if consensus emerged from the lending community around a third way that would have them competing for the subsidies they earn from the federal government."
Video of the event is available here. A full transcript is available here.
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A banner day for Direct Loans!
You have to admire the chutzpah of Mr. Shireman when he says, "it's not a system that assures that the loans are actually made." Who is he kidding? I guess the euphoria of FFEL's eminent destruction has induced some kind of amnesia in the man? FFEL lenders have been in the business of making student loans for over 40 years without disruption. If we're concerned about today's environment, Congress could very easily raise the profit margin to FFEL lenders to compensate for the unprecedented risk and liquidity premiums prevailing in the capital markets (i.e., to make the cost of acquiring private-wholesale capital economic). But unfortunately for FFEL providers, this is not in the cards. As a great man said, "A crisis is a terrible thing to waste!" You don't need to read Sun Tzu to know that when your enemies are at their weakest...crush them! (Constitutional government notwithstanding of course!)
Perhaps the most brazen exhibition of truthiness on display at the NAF conference was when Mr. Delisle said something to the effect that miraculously, there would be no increase in the federal debt when the Direct Loan takes over from FFEL. Are we sure about that one NAF? All this is more evidence that Direct Loan mania knows no loyalty to the truth! Fess up NAF! FFEL is an obstruction that must be removed to continue traveling on the long road to "free" college for all! Definitely a "New America", it remains to be seen though whether all this social alchemy produces the desired results. History is not on your side.
As a fiscal conservative I
As a fiscal conservative I can take solace in observing the current arrogance of the left wing crowd, in that as they get more inebriated with power and step further over the line of common sense, it almost assures an electoral backlash down the road. For that I am anxious and optimistic.
In the meantime, I don't really care about the rubble that is left behind (schools, and students) because I've moved into a new industry safe from government regulation and I am ten years away from putting a child through college. Unfortunately the folks at NAF and others of their ilk don't seem to care about the rubble either.
Sad day.
Gross abdication of responsibility
I too heard Bob Shireman say that he "did not rule out considering other proposals," as the article above reports. Think for a moment what an abdication of responsibility that is. Just consider all the various ways, short of total elimination of the program, that the new Administration could have proposed to “fix” the problems they see in the program. That was never an option. They don’t rule out other proposals; just don't expect them to come up with them. No, they deem it's not their responsibility to preserve a program that --serves most schools --serves most students and gives them choice --keeps the government out of the retail banking business. Instead, they opted to foreswear alternative approaches and go for the jugular. Because of their arrogance and ideological orthodoxy, they're going to make schools spend a lot of money to make the switch, put a number of people out of work and eliminate any notion of consumer choice or inter- and intra-program competition.