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Obama’s Trump Card
Prospects for President Obama's proposal to eliminate the Federal Family Education Loan (FFEL) program remain uncertain. Democratic leaders in the U.S. House of Representatives and the Senate continue to be divided over whether or not to go forward with a controversial budget procedure known as budget reconciliation, which would make it significantly easier for the President to get the votes he needs to achieve his goal.
But even if the White House fails to persuade Congress to move ahead with its plan this year, the student loan industry will not be able to rest easy. That's because the administration has a trump card up its sleeve. An emergency law that is currently propping up FFEL-- the Ensuring Continued Access to Student Loans Act (ECASLA) -- is set to expire in about a year and a half, and the Obama administration doesn't appear to have any intention of asking Congress to renew it.
Robert Shireman, a senior advisor at the U.S. Department of Education, said as much at an event here last week on "The Future of Federal Student Loans" when he responded to a concern that the administration was rushing through its plans to overhaul the federal student loan programs. Regardless of whether the proposal to end FFEL goes through, "ECASLA only goes until this next coming year," he said. "A decision has to be made."
Last spring, Congress effectively shored up the system by allowing the Education Department to buy FFEL loans and lend federal money to lenders. In other words, the bank-based program's survival now increasingly depends on the government providing federal capital to lenders to make the loans.
ECASLA covers loans only through the 2009-10 school year and officially expires in September 2010. Some loan industry officials have floated the idea of making the emergency law permanent. But the Obama administration doesn't see the need for the government to run what has become essentially a second Direct Loan program -- particularly when the existing one is working so well. "The Direct Loan Program, which uses market process to determine subsidy payments to servicers, has suffered no disruptions and continues to function at lower cost to taxpayers," the President's budget overview states. "The Administration's goal is to continue to tap low-cost, stable sources of capital so students are ensured access to loans."
So the loan industry pretty much has to decide between taking the types of consolation prizes that the White House is offering now (Note to guaranty agencies: $500 million in mandatory spending a year for your college access work is surely better than nothing!); coming up with an alternative reform plan that may or may not be acceptable to the administration and Congress; or hoping against hope that the financial markets improve enough that they are not at all dependent on federal financing to make government-backed loans.
Although they may not fully realize it, colleges and students have a lot riding on the outcome of this debate. Under the President's plan, money saved from ending FFEL would be used to turn the Pell Grant program into a true entitlement for low-income students by financing it entirely through mandatory funding. Achieving a Pell entitlement has long been a dream of student aid advocates, including, incidentally, the National Association of Student Financial Aid Administrators, which opposes Obama's plan.
But if the Obama administration loses the battle this year, and simply allows ECASLA to expire, there's no guarantee that the savings would go anywhere but to deficit reduction -- and that would truly be a wasted opportunity.
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Winners and Revenue Raisers
Steve Burd has decided to go there: name who wins as a result of eliminating FFELP.
He's exactly right. "Under the President's plan, money saved from ending FFEL would be used to turn the Pell Grant program..."
But if one wants to name winners, let's look at the losers. Anyone in the future who borrows money from the Direct Loan program. As long as Congress allows the DL program to generate $94 billion in savings, borrowers will be paying too much for their loans. Borrowers are basically, as our friend Luke Swarthout once remarked, "a revenue raiser."
Curious, isn't it, that it's okay for colleges to support the plan ("Colleges and students have a lot riding on the outcome of this debate"), but it's not okay for them to oppose it? If colleges oppose it, they're being bribed, according to this web site.
Even more curiouser is it's okay for the government to generate profits, but sinful for lenders to do so. (Ah, you're not against profits, just excessive ones, you'll say. $94 billion's not excessive! Moreover, you've never met a lender profit you ever liked.)
The incoherence and bias of this web site continue to astound me. NAF is on an ideological witch hunt.
Yes! Please play the trump card!
ECASLA is set to expire right at the beginning of a new School year. So, Obama lets ECASLA expire, FFEL lenders can't disburse, students are supended and forced to re-apply to the Federal Direct program and then wait on an overburdened FDLP to disburse funds before students can attend classes.
All this at the start of a new Presidential campaign season. The GOP candidates won't be able to thank you enough Mr. President.
FFEL Program Should Be Eliminated!
Competition between DL and FFELP only works if both programs play by the same ethical rules and guidelines for the benefit of the college student.
We have seen all the improprieties of the FFELP system revealed by Andrew Cuomo (Attorney General of New York) starting back in 2007. If you are not up to date regarding the current news regarding the FFEL program feel free review this internet page under "Student Loan Scandal Page" (look on lower right hand corner of this internet screen) and review the history of this scandal.
In my opinion, if we are going to use tax payer money to fund student loans I’d rather have the government collect on the interest rather than Nelnet, Sallie Mae or some other FFEL provider. Maybe the government can use this interest to help pay down our growing HUGE national debit created by these same unethical student loan companies who extorted taxpayer money for their own personal interests.
Keep FFEL, it's a good idea
Hi John, I understand your frustration with programs like FFEL when reading about the Cuomo investigation. But it's important to remember to keep that investigation in perspective. Of the 100's of lenders investigated only a handful of lenders were required to sign a "consent" order. There were no criminal charges or findings. The "bribery" consisted of gifts of meals, tickets, trips, and while this sounds unethical, it's often a common practice within any industry to build relationships by inviting customers to attend these types of events gratis. If any aid professional accepted these gifts knowing that it would lead to higher costs for their students, then that's an indictment of the school. But I believe that every school and aid administrator is committed to providing the best value to their students and they fully research which lenders offer the best benefit and value to their students.
The value of competition is not so much between DL and FFEL as it between FFEL lenders. If one lender were to become too profitable (as is the fear of so many) then there are any number of lenders who can compete to provide same services at a more affordable price and so competition keeps the system as efficient as possible. With a government monopoly there is no control of cost. And since the government doesn't have any money to lend it must borrow the funds itself and add to the national debt.
Good points, Neville
The previous commenter makes several valid points.
The problem is that the people who write for this site and most of its readers aren't interested in reason. This is either about ideological purity or misguided naivete or a bit of both.
Disagree (Keep The FFEL, it's a good idea)...
Neville & Alex:
I understand your defense of the FFEL program but I have to respectfully disagree in the following two (2) ways:
1) A FFEL lender does not compete against other FFEL lenders in the event that the Direct Lending program saves an estimated $94 billion of taxpayer money. If you recall the United States Office of the Budget (US Budget Office) estimates the Direct Lending program will save taxpayers an estimated $94 billion in taxpayer revenues by “cutting out” the middleman (i.e. the private FFEL lender) in the loan origination and disbursement process. Hence, this is a HUGE budgetary savings that can be applied toward the growing national debit or helping the underprivileged college student by supporting the PELL Grant program.
With all due respect, given the facts above, the FFEL program CAN NOT COMPETE against Direct Lending since the federal government (Department of Education) can originate and disburse a student loan at a fraction of the cost in comparison to FFEL. That is just my point. In my opinion, get rid of the middleman FFEL lender that is not adding / creating value to the taxpayer or federal government origination and disbursement process.
2) Secondly the Department of Education under the Bush Administration never provided adequate oversight for the FFEL program in the first place. For example, many private lenders and state FFEL guarantors in addition to Nelnet and Sallie Mae (i.e. Pennsylvania Higher Education Authority as one example) charged the federal government 8% in loan revenue premiums but only transferred less than 2% of the credit on to the student keeping (pocketing) the remaining 6% cash interest to boost their own corporate profits. In my opinion this is absolutely UNETHICAL if not darn right THEFT and the Department of Education under the new Obama Administration should use every legal / political opportunity to get this money back into the hands of the American taxpayer. Once again, my argument is to bring taxpayer money back under the umbrella for which it belongs with the federal government under the Direct Lending program.
Just so you know I was employed by a FFEL service provider for nearly 7 years and saw the abuses to the American taxpayer / government firsthand. For that very reason I voluntarily and willfully resigned from my “comfortable” position within the FFEL industry and became a Certified Financial Planner® fiduciary (under a different name than John Dowe) helping parents, students, and state college / universities plan for alternative sources of college financing outside of the private lending and FFEL student loan industry. I understand student loans are a necessity to keep our hard working students (minorities) in school; however, also I believe that my role as a fiduciary mandates supporting parents and students with the highest degree of independent ethical education planning and financing available. This fiduciary role should not be taken-on by me alone but is the role of the federal government by making sure the taxpayer, parents, and students are treated ethically, fairly, and with complete transparency. As history shows the highest degree of ethical standard and fairness can only come from support of the Direct Lending program.