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More Scare Tactics from the Student Loan Industry and Friends

Now that legislation is moving forward that would carry out President Obama's plan to eliminate the Federal Family Education Loan (FFEL) program, the student loan industry and its most hard-line supporters in the financial aid world are doing what they do best: spreading fear about proposed changes to the student loan programs that would be harmful to their interests.

Take, for example, the Consumer Bankers Association (CBA). In a press release last week, the group wrote that the House Education and Labor Committee's approval of the bill was "a setback for students."

Come again?  The legislation would use savings from ending FFEL to boost spending on Pell Grants by $40 billion (yes, you read that right -- 40 BILLION DOLLARS) and significantly expand the low-interest Perkins Loan program so that financially needy students can avoid taking out high-cost private student loans.

So how exactly would the bill's passage harm students?

According to the CBA, if the legislation is enacted and student loans are made entirely through the U.S. Department of Education's Direct Loan (DL) program, "students and parents would no longer have a choice of lenders, a right they've had since 1965."

A group of financial aid directors -- who appropriately call themselves "the Friday the 13th Group" -- made the same point in a letter they sent to lawmakers in April opposing President Obama's proposal. "By eliminating the FFEL program, we essentially remove the ability for borrowers to choose a lender," the group wrote. "This inherent freedom has been available for more than 40 years." ("Inherent freedom? Are you kidding me?" a financial aid administrator who supports the continuation of FFEL but is critical of the group's approach wrote recently on a listserv for aid officers. "Now freedom of the press, freedom of speech, freedom of religion - those are inherent freedoms.")

At Higher Ed Watch, we understand the appeal of this argument. But we also know that it is nothing more than a red herring.

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?

Now we know that Congress took steps last year, as part of the Higher Education Act reauthorization legislation it approved, to give students at least a modicum of choice. Under the measure, colleges that have "preferred lender lists" will be required to recommend at least three lenders to their students. That provision has not yet gone into effect, as the U.S. Department of Education has only today released proposed rules to carry it out. Regardless, nothing in these regulations will prevent colleges from continuing to steer the vast majority of their students to a favored lender.

The truth is that students don't really have much of a choice in the FFEL Program. Most financial aid administrators provide a preferred lender list -- which in and of itself narrows down their students' choices. The vast majority of students stick to their aid administrators' recommendations. Notice that most lenders who have tried to buck this trend -- like MyRichUncle -- have ultimately failed.

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.

At a House Committee on Education and Labor hearing in May, Rep. Tim Bishop (D-NY) said that the lenders' claim that students would lose choice under the President's proposal was "a seductive argument." However, having been a college administrator for 29 years before coming to Congress, he said it just didn't ring true.

"I never once heard a student say, ‘Gosh, I wish I had a choice,'" Bishop said. "They were grateful to know that that there was a source of money available to them."

The financial aid administrator who wrote into the financial aid listserv criticizing the Friday the 13th group's letter agreed.

"Most students don't even know who their lender is. With the main point being -- they don't really care," he wrote. "Students are just interested in getting their money. They are not concerned about who is providing it to them."

He added, "I am supportive of maintaining both the DL and FFEL programs." But if ensuring student choice "is our biggest argument for saving FFELP (and I have to assume it is because it was listed first in the letter), then FFELP is in big trouble," he stated.

We couldn't have said it better ourselves.

Jason Delisle contributed to this post.

This article seems to miss

This article seems to miss the point entirely no matter what side you are on. How is the government borrowing the money at less than 2% and loaning it at over 6% not considered profit made by the federal government. And if in fact it is profit made, why should students that must take out loans be required to pay for Pell Grants for other students. Even more insane is that this "profit" made by the federal government will be used to pay down the deficit. Isn't this really just a tax on students. Wouldn't the fair plan be to loan the money to students at a very small margin to cover cost and default and let the students decide who they would like to support?


Lest we forget, millions of borrowers did exercise choice through the consolidation loan process. Many escaped the dreadful service and lack of incentitives provided by their then current loan service provider.

In a Direct only world there is no opportunity for choice should one want to exercise it. In the new world one arm will always be proverbially tied behind ones back.

Further, let us not paint all within an industry by the misguided actions of some; highlighted by the polictical glory-mongering of one.

Many good, borrower-focussed, efforts came forth in this industry by the creative innovation of those within the private sector. Name one truly creative, borrower focussed, repayment or of default aversion innovation that came forth through the creative juices flowing at the Department of Education -- it does not exist.

Yeah, but after I

Yeah, but after I consolidated my private loans into one private loan, I am stuck with ACS forever because of the "one consolidation rule."

Thanks for all the choices I now have, private sector. Way to lobby Congress to eliminate refinancing rights.

Know what you are talking about

This bill has NOTHING TO do with your private loan. The mere fact that you had to borrow a private loan says to me that A)you selected a school that was too expensive for you and B)borrowed way too much for what I am sure was your "living expenses". YOu should have shopped around and found the least expensive way of getting your education. AKA, living like a student, mac N cheese, top ramen, 3 roommates and 2 jobs to start.

Lastly, Private loans have nothing to do with FFELP at all. They are just that, "private". So you like many others out there who now blame credit card companies for spending beyond their means, now blame the people who gave you the credit in the first place.

When oh when will students/consumers wise up and accept responsibility for their actions. Realizing their college DREAMS also contain a price tag is a valuable lesson that I thought used to be common sense!

YOU have not clue!

My brother lives at home, goes to a state school and works a part-time job. All of this, and he still needs a private loan to cover the gaps in his college financing. Direct Loans still aren't enough to even satisfy his tuition. So, you have no clue what they hell you are talking about.

Nice plug "Getaclue". I'm willing to bet you're a paid plug by Sallie Mae.


Students and taxpayers might want to read the letter posted today by the non-partisan Congressional Budget Office on its website that indicates that eliminating the FFEL program does not save nearly the $87 billion over ten years claimed by the CBO itself. The admission is in a letter written by CBO director Douglas Elmendorf to Senator Judd Gregg. The letter suggests that actual savings under the Miller/Obama student loan bill are overstated by at least $40 billion.

First the letter reads, "of the $87 billion reduction in direct spending, roughly $7 billion would be offset by an increase in future appropriations for administrative costs." It later notes that "CBO estimates that if projected savings for the President's proposal were calculated using risk-adjusted discount rates, these savings would be $47 billion over over the 2010-2019 period--a difference of $33 billion relative to CBO's cost estimate for H.R. 3221 issued on July 24.

What this means if you are a student is that the promised increase in Pell Grants may never occur. Chairman Miller, with the apparent support of the Obama administration, abandoned the promise of a Pell Grant entitlement in favor of including new mandatory spending of $29 billion for eight new or expanded programs. Oddly, we haven't heard this blogger complain about that.

Enactment of H.R. 3221 would result in new deficit spending of $26.5 billion over ten years once unavoidable administrative costs and risk-adjusted discount rates for loans held by the government are taken into consideration.

Unfortunately, the real economics of the curiously-named "Student Aid and Fiscal Responsibility Act" get even worse if you reject, as I do, the assumption that 70 percent of all loan volume would be made by FFEL lenders for the next ten years unless Congress terminates the FFEL program. The Obama administration itself has justified ending private lending with the claim that lenders would not make student loans unless ECASLA were extended. Guess what? That program expires well in advance of 2019. In addition, as everyone except for CBO seems to know, the economics of the FFEL program were largely destroyed by two previous budget reconciliation bills. If you want to see a list of lenders that have already quit FFEL visit Mark Kantrowitz's Fin-Aid website.

Simply put, the official budget score for the Miller/Obama bill produces savings by taking credit for something schools may be highly likely to do even if the bill was not enacted. How might a more realistic assessment of future loan volume trends effect the budget score? Answer: All savings might very well disappear.

CBO director Elmendorf demonstrated courage in writing his letter to Senator Gregg. We wonder if House members will demonstrate similar courage and abandon a fundamentally bad piece of legislation now that it it's fiscal irresponsibility has been proven.

Congress should be working to create a student loan program that supports consumer choice. That's what the President says is necessary for quality in health care and we agree with him.

Those interested in reading the full CBO letter, please visit www.cbo.gov.

Funny, I wasn't given a

Funny, I wasn't given a choice. I was told SALLIE MAE IS OUR ONLY LENDER!!!!!!!

Yes, a setback.

It's very easy to understand why this is a setback for students and parents who borrow.

In exchange for giving some, but by no means all students additional aid, the government is creating a monopoly that forces every student and parent for all time to turn to one lender for student loans.

Most economist would condemn such a trade-off.

Student and parent borrowers lose in these ways:

--Say good-bye to price competition as there will be no lenders to compete with interest rate discounts.

--Say good-bye to having options if you're not satisfied with the service you're receiving.

--Say good-bye to the default prevention services that have helped thousands, if not millions, of borrowers stay in repayment and avoid default.

--Stay good-bye to service innovations that borrowers will miss out on in the future. If anyone knows of a service innovation introduced by a government contractor, I'm all ears.

Finally, Bishop's statement about what students is besides the point. Did consumers care where they got their gasoline when Standard Oil was broken up? Did consumers really care who handled their long distance calls when ATT was broken up? Of course not; that was never the point then and isn't the point now.

Alex, many students who had

Alex, many students who had to take private student loans were forced to take loans with multiple lenders while they were in school. This is because one bank is not willing to assume the risk of financing one student's entire education.

This was what happened to me in law school. Tuition was 33,000 and federal student aid only covered up to 18,500 of that amount. I covered the gap with a citibank private loan my first year. I had no problems with citibank and wanted to stick with them. However, they refused to loan to me in my second year, stating that my debt was too great. Sallie mae lent to me though. Then, they wouldn't lend to me in my third year, so I turned to wells fargo. Mind you, this was just to cover tuition for my law school (which is now 43,000 per year. outrageous)

So the reason I had to take a consolidation loan was to avoid having to deal with 5 or 6 private different bills-not because the now defunct Education Finance Partners was offering any great rate. 11.5% on a 64,000 dollar loan, which by the way I cannot refinance thanks to special lobbying by the private lending industry which promotes the "competitive market" you so glorify.

Well okay, maybe it's not a

Well okay, maybe it's not a setback for students, but it is for some Stafford borrowers. Incentives offered by FFELP lenders were not only rate breaks- fees were paid and in some cases state guarantor agencies reduced principal and offered limited loan forgiveness when their loan volume was high.

The problem is everyone acts as though students are students, and when financially needy students are benefited by more Pell grants, somehow all "students" benefit. Well, financially needy students are people, too and many people are without health insurance. Why not take the savings and buy health insurance for those people who have none? That way, everyone who is a person will benefit.

DL, as envisioned looks like more of the same to the consumer

The worst outcome imaginable to me is one where David Hoeft CEO of Premier Credit of North America (www.premierecredit.com) still can walk past his sharktank, pinching himself, as his company attaches itself to misfortunate borrowers (many of whom were mislead, or railroaded into default), and sucks them for all they are worth, even if it means snagging their social security or disability checks (isn't that more analogous to a suckerfish or a bottom fish?). I hope that with an historic opportunity like this- a clean slate that will likely not come around again for decades- we would be looking slightly past narrow self interest, and shooting for better. Unfortunately, I don't see it, and neither do any informed borrowers that I know.

Put yourself in the borrowers shoes truly, and what you see is virtually identical. Sallie Mae, Nelnet, or some other well established entity under the current system will be both servicing your loans after graduation, and and (conveniently), coming after you for far, far, far more after they default you, should your loans be defaulted, as happens to approximately 1 in 3 borrowers (maybe more?) at the undergraduate level as best as I can determine based on IG estimates from 2003.

The same perverse incentive to default a loan may well exist under the new system, guaranteeing horrendous, confusing, and even misleading customer service. Still no bankruptcy protetions, statutes of limitations, etc. Still the same draconian collection powers...

Ultimately, we're looking at a system that still fails to encourage academic excellence, low cost, reasonable time of attendance, and ultimately, one that promotes delinquency and default. While certainly bureaucrats shangri-la, the massive and indisputable problems in today's system persist across both Direct Loan (DL), and Federal Family Education Loan (FFEL), and hybrid programs proposed for the future.

I take no position in the debate, but if we're going to make government bigger in this, let's at least put some safeguards in place that will encourage good government, as opposed to the bad joke that we have had at FSA for the past 8 years. This, of course, begins with returning fundamental consumer protections that were taken away for no good reason so many years ago.


I've never seen the 1 out of 3 borrower default figure anywhere. In addition, the suggestion that guarantors benefit from default would seem to be undercut by the low default rates most of the big guarantors claim for FFEL loans. I think Mr. Collinge's is referring to ALL student loans, including private loans, which would certainly pump up the default rate figures. What he and other student loan activists would like ultimately is interest free loans and loan forgiveness and Direct will probably move more and more in that direction.

Score This

Would Relevant Critic support adding to SAFRA a strong set of consumer protections that would lower defaults, and then on the basis of cost-of-risk scoring, save even MORE than the CBO $80-plus billion? If he is concerned about students, he would; if he is concerned about propping up lenders at the expense of students, he would not.

Another thing CBO should score, while we're at it, is the savings from removing conflicts of interest and fraud in the FFEL system, which add to cost-of-risk. Currently CBO does not score against FFEL the arrangements between lenders and guaranty agencies that have led to ruined lives, let alone the lost economic productivity and taxes that these once-hopeful borrowers would otherwise have contributed. Fraud and corruption in the FFEL system has been so rampant that its prospective elimination deserves its own scoring estimate.

Bad Resume for Bankers

These bankers, guaranty agencies acting as bankers, and their lobbyists don't want us to change the bad air in the room. It's not about what they are arguing. It's about what they are NOT arguing:

• They are not arguing that they will eliminate interest rates, penalties and fees (like micro-lenders do) and make up these losses from other sources.
• They are not arguing that we will lose an irreplaceable group of highly effective bankers and guarantors.
• They are not arguing that they have strengthened our nation and led by example of honor and integrity.
• They are not arguing that borrowers prefer them or feel safe with them.
• They are not arguing that they are champions for the borrower.
• They are not arguing that they will lobby and work to restore consumer protections, and treat borrowers as if those protections had already been restored.
• They are not experimenting with or brain storming ideas to forgive student loan debt or properly manage default.
• They are not pointing to altruistic works that changed the trajectory of our nation and helped our young become better citizens.
• They are not arguing that they are the most trustworthy and that their record keeping is a thing of precise beauty.
• They are not arguing that they are going to charge almost nothing for the loans, to the point where they will make offers borrowers can't refuse.
• They are not arguing that they are going to improve their level of service above and beyond what is required under the Higher Education Act.
• They are not arguing that they will find a way to not only stop the rise of tuition but lower it very significantly.
• They are not arguing that they are trying to increase borrower's rights, even to their own detriment.
• They are not arguing that they will start reporting accurate information to credit bureaus.
• They are not arguing that they will start providing timely information about the loans to the borrowers.
• They are not arguing that they will find a way to assist those who have already defaulted in a way that makes obvious sense.
• They are not arguing that FFELP is a highly successful government program that should serve as a model for other government programs.

We must not forget that these people are asking taxpayers for a job. How could we possibly hire them with their track record?

They are bankers. They are in the business of making sure they have as many people indebted to them as possible. When they maximize debt, they reach full power--the power to manipulate elections and legislation. They are already more powerful than the IRS and rich enough to buy golf courses with their discretionary income. When they argue about competition, they are really arguing for more opportunities to have the loans exchange hands between competitors.

Bankers don't care about the optimal weave for the fabric of American society. But the federal government does bear that responsibility. Clearly, bankers are not trying to help the federal government act responsibly.


Belinda's comments are well said, well researched, and provide the correct context in which this discussion should be viewed. When I first began to research this lending system, it took roughly 4 hours to arrive at the obvious conclusion that the removal of bankruptcy protections, statutes of limitations, and other consumer protections was blatantly unjust, and used for purely predatory purposes that help the bankers (or their banker friends) financially, but greatly harm citizens financially, and a number of other ways as well.

Here we are after nearly 5 FRUSTRATING YEARS of pointing out what is patently obvious (for no pay...only the principle of the thing), only to be bested by some anonymous banker who has no argument, only distraction and confusion tactics. On one hand, I feel like I've become some sort of free entertainment source for these people, who take amusement in my frustration with their obvious tactics...but on a more profound level, I have to ask after a half a decade of this hugely costly volunteer activity I have engaged in...What kind of man could live life like that...distorting truth, persuading observers that what they see is actually a lie- whatever it takes to keep the truth from being recognized as such, day after day, after day? I can say that this goes beyond arrogance, greed(and underlying insecurity), and enters into the realm of the pathological.

I know quite a few bankers personally, judge them to be largely decent as most citizens, and even call them friends. Yet the professional behavior I have witnessed by bankers in this debate and others makes me wonder how one could not be degraded morally after a career doing this, knowing the worse-than-useless function they chose to engage in did nothing useful, and hurt the cause of truth honesty reasoned debate, and problem solving.

What is truly frightening, however, is that the Office of Federal Student Aid has long been run by this culture. Bob Shireman is an honest man in my estimation, and I do not envy his position. Arne Duncan strikes me as a guy who won't suffer through bullshit from his staff for very long before cracking heads. As the truth about the lies, misdeeds, and clear corruption developed within FSA over the past 8 years come out, I have to believe that those responsible (largely bankers from various student loan enterprises one must presume), I would hope that swift removal and replacement is the solution for those with the audacity to attempt to hang onto their positions. Then we can start talking truth and solutions in an atmosphere of trust, respect, and good faith.

I hope I am right in my estimations and assumptions above, because if i am wrong, then what is currently a serious, agency-wide crisis will inevitably become a big, bad government catastrophe.

Goodbye to FFELP

Make no mistake... lenders make loans to make money. They are for-profit enterprises and student loans are no different than credit cards or home mortgages. The government guarantee and interest subsidies have kept lenders in the market because without it who would want to make unsecured loans to unemployed (granted in school) 18 year olds that don't even enter repayment until years later?

In the "good ol' days" when subsidies were higher and more profit margin existed, lenders did compete on pricing and students were better off with zero origination fees and interest rate reductions of up to 2% in some cases. Sure, there were caveats to earning some of those benefits, but there are rules to everything and students should have been aware of what those requirements were. Students who played by the rules were better off and saved significantly on their loans. Others who make poor choices or are ignorant to what they're doing, shame on them. I acknowledge some lenders, especially those DTC lenders, did go out of their way to confuse the borrower but for the most part most of your national lenders were above board on their practices.

Now that subsidies have been cut so drastically, student loans aren't the profit generating product they once were. Practically all lenders are offering the same product features with no special benefits so the argument of choice being gone doesn't resonate with me. Loans will still be serviced at the usual places, like Sallie Mae and Great Lakes.

What we will see, I think, is less customer service and a more government approach to it. There's no incentive to provide great customer service, no incentive to keep hold times to a minimum, no incentive to go out of the way to help students or families. Try calling the IRS and getting help.

What I also think is a shame is that there's no other tangible benefits to the majority of students who have to borrow student loans who don't qualify for Pell or other sources of need-based aid. Those middle income families who make enough to not qualify, but realistically like most of us will struggle to pay for college and have to rely upon student loans. Whichever number you use for the cost savings, that money saved from the majority of middle income borrowers will help those in the needier categories... typical of Obama's redistribution of wealth. Wouldn't it be better to see those savings actually given to those who are borrowing directly from the program? But nope, it will be redistributed.

It's a shame.

Levels of Service...

Actually, Anonymous One, I ***HAVE*** dealt with the IRS in paying off a five-figure tax debt. My experience with the IRS was as follows:
1) I spoke with people who spoke back to me in INTELLIGIBLE ENGLISH;
2) I spoke with people who gave me real-sounding names and a unique ID number.
3) I spoke with people who were flexible when I needed them to be;
5) I spoke with people who, in response to my request for more information, didn't tell me I was "wasting [their] time."

Contrast this with my experience with the beggar-bounty hunter private collection agencies which have handled my alleged defaulted student loans. Currently, they are being "serviced" (with no added value) by Premiere Credit North America, the friendly folks with the SHARK TANK in their lobby that Alan Collinge mentioned in a comment above:

1) I received celphone calls from people claiming to be calling for a loan reference for a relative when none of my relatives gave me as a reference anywhere near the time frame of these illegal, misleading messages;
2) I was told by a collector at Premiere that "being this is a federal debt, normal debt collection practices do not apply;"
3) Phone calls to me were made with caller ID "ANI Spoofing," which caused my employer's phone number to show up instead of Premeire Credit, and;
4) I was told by another Premiere collector, in response to my request for validation of my alleged student debt (i.e. copies of promissory notes) that I was "wasting [his] time."

I was proud to be part of the grass-roots effort to help end the Private Collection Agency initiative at the Internal Revenue Service. Reading the sore-loser whining of CBE Group head Tom Penaluna was worth all of the effort.

Actually, no, when the

Actually, no, when the government provides an essential service to people without a profit motive, it is doing it's job; and in doing so, it is always more efficient, involves less paperwork, a higher degree of service at less cost and more accessible to a wider range of people. "Competition" does not improve when providing essential services to people; in fact it is not "competition" then, it is privatization whereas the private companies, instead of trying to make a better product, charge incredibly high rates and use their wealth to lobby in order to weaken and beat down the government service to the extent that it still exist. I would much, much, much rather have not had private loans forced down my throat, at 18, from people who seemed more savvy than I was at the time.

Just as single-payer healthcare would be the most efficient, cheapest, and fairest, so would eliminating the private, for-profit motives from education and at the very least bringing us back to the sort of system we had back in the 1960's, when tuition costs were very low, loans were uncommon and never private, and had full consumer protections attached to them. I don't think back then any students considered themselves "consumers" that didn't have the "choice" of being put 70,000 dollars in debt by predatory corporations.


Corporate donations provide the dirty fuel that powers Anti-Student legislation. Clean elected representatives are at a disadvantage as they try to move both student loan and health care reform through Congress. UPI reports that “The 52 Blue Dog members outpaced other congressional political action committees in fundraising so far this year, collecting more than $1.1 million through June….More than half the money came from the healthcare, insurance and financial services industries...” (“Liberals See Red Over Blue Dog Donations” http://www.upi.com/Top_News/2009/07/31/Liberals-see-red-over-Blue-Dog-do...). It seems that the so-called “conservative” Blue Dog Democrats have changed their colors for no other reason than because the pay is better on the other side of the aisle.

It has been said that Congress should be forced to wear NASCAR uniforms so we know who their corporate sponsors are. Rep. John Boehner (R-Ohio), who has taken thousands of dollars from the student loan industry, would have to pull a trailer behind his racecar to have enough room to display all the names of all of his corporate sponsors. Speaking in front of an annual meeting of the Consumer Bankers Association, Boehner reassured bankers that:
“Know that I have all of you in my trusted hands. I've got enough rabbits up my sleeve."

Hoboken, New Jersey Mayor Peter Cammarano was arrested last week for public corruption and taking bribes. He reassured a briber by telling him that,
“You can put your faith in me…I promise you…you’re gonna be treated like a friend.”

Why is just one of these two behind bars?

American goverments policy

Americans borrow almost $90 billion/year to attend college. About 2/3 of college students require loans to make it through, and typical undergraduate borrows leave school with over $20,000 in student loan debt, $42,000 for graduate students. Student-loan holders can garnish a borrower's wages, tax returns, Social Security, and disability incomes - without a court order. Defaulted loans do not qualify for forgiveness for eg. teaching in under-served areas. The Bush II administration strangled the Federal Direct Loan Program to about 19% of the market.