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Obama's Bold Proposal

February 26, 2009 - 3:58pm

The Obama administration on Thursday laid out a bold plan that would turn the Pell Grant program into a true entitlement for low-income students and pay for it in part by eliminating the Federal Family Education Loan (FFEL) program once and for all.

The proposal, which was included in President Obama's 2010 fiscal year budget overview, is sure to create a firestorm of controversy on Capitol Hill, where the student loan industry has many friends in both political parties. Ultimately, the budget blueprint recognizes a couple of hard truths about the federal student aid system that Higher Ed Watch and our sister blog Ed Money Watch have helped expose.

First, the way the federal government is currently financing Pell Grants is a huge mess, as Jason Delisle, the research director of New America's Education Policy Program, recently wrote. Congressional appropriators currently set the maximum Pell Grant each year based on estimates of expected demand for the grants made by federal budget officials. Because the estimates are made far in advance, they are generally off the mark. As a result, the Pell program has often been plagued by large budget shortfalls. To make up for the gaps, the Department of Education often dips into future program funds, pushing the shortfall off to the future.

In recent years, Congress has created new funding streams (through the College Cost Reduction and Access Act of 2007 and the giant stimulus package that Congress recently approved) to boost spending on Pell and increase the maximum award. These new funding sources, however, are only temporary. When they run out, policymakers will again face the tough choice of either substantially decreasing the Pell Grant (by more than $1,200) or shelling out billions of dollars more just to keep the maximum award constant.

President Obama's budget blueprint seeks to put an end to this budgeting nightmare by financing the program entirely through mandatory funding, meaning that spending for the program would no longer be determined through the annual appropriations process. The president proposes raising the maximum Pell Grant to $5,550 for the 2010-11 academic year, and then indexing future increases to the Consumer Price Index plus 1 percentage point so that it will keep up with inflation. "To make sure that we have a highly-educated workforce and that the opportunity to go to college is not determined by how much money you have, we need to put the Pell Grant program on sure footing," the budget overview states.

On its own, this proposal would not be too controversial. While fiscal hawks may object to creating a new federal entitlement program that will ultimately cost tens of billions of dollars a year, groups representing students and colleges have long embraced the idea. The plan, however, is certain to cause a furor in Congress because President Obama plans to pay for it in large part by eliminating the FFEL program and providing government-backed student loans entirely through the Direct Lending program. Under the proposal, the Department of Education would stop providing subsidies to FFEL lenders on new federal loans as of July 1, 2010. Lenders would continue to receive subsidies on existing loans.

That brings us to the second hard truth: credit market disruptions have made the FFEL program untenable. Only an emergency law -- the Ensuring Continued Access to Student Loans Act (ECASLA) -- saved the system by allowing the U.S. Department of Education to buy FFEL loans and lend federal money to lenders. In other words, the bank-based program's survival depends almost entirely on the government providing federal capital to lenders to make the loans. Sounds a lot like Direct Lending, doesn't it?

The federal government has gone to extraordinary efforts to help the student loan industry cope with the turmoil in the financial markets. But how long will it continue to have to do so? There appears to be no end in sight for the credit crunch, and some lenders have even floated the idea of making ECASLA permanent.

The Obama administration doesn't see the need to keep propping up FFEL when there is a less costly, more stable alternative in place. "The Direct Loan program, which uses market processes to determine subsidy payments to servicers, has suffered no disruptions and continues to function at lower cost to taxpayers," the 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."

At Higher Ed Watch, we applaud the administration's gutsy proposal. Now let's just see if Congress has the guts to recognize these hard truths too.

For more details on President Obama's 2010 fiscal year budget overview, check out this post on Ed Money Watch.

Hard truths? Or bold-faced lies?

Gee NAF, if "credit disruptions" are the latest justification for FFEL being untenable, then we better go ahead and nationalize the entire financial system shouldn't we? Did you forget about the Agency Purchase Program, Agency Discount Notes Program, Agency Mortgage-Backed Securities Purchase Program, Term Primary Credit Program, Term Auction Facility, Primary Dealer Credit Facility, Term Securities Lending Facility, Asset-Backed Commercial Paper Money Market Program, Mutual Fund Liquidity Facility, Commercial Paper Funding Facility, Money Market Investor Funding Facility, Term Asset-Backed Securities Loan Facility, and last but surely not least...the infamous Troubled Assets Relief Program (TARP)?

Sure sounds like there's plenty of other lending out there that's currently untenable as well NAF! By Obama/NAF logic, that means there is lots of nationalization needed! Oh, wait a minute...Obama said the government doesn't do a good job running banks! (Yes, I'm quite sure I've heard the Obama administration say this several times over the last few weeks!) And what do banks do NAF? They lend! So, Obama says on the one hand that government doesn't do a very good job lending, but on the other hand he feels compelled to completely nationalize student lending! What a wonderful contradiction! And finally, who is it that determines the tenability of FFEL lending anyway NAF? Why, that would be Congress of course! So, if FFEL is untenable for the private sector, then it is because Congress has made it so! Some hard truths indeed. Maybe it's time for the big-government types to own up to the fact that there is no reasonable justification whatsoever for the elimination of FFEL? After all, this is the era of transparency in government--no?

I understand why Obama and

I understand why Obama and his administration wanted to prioritize education such as in the budget and in the stimulus package. Still, as mentioned here, the way Pell grants are being handled are kind of, well, as said, "messy." I think it's pretty interesting to see how this situation unravels...

Student Loan Proposal

I've got news for you Bubba, if one believes that current financial market conditions will keep going forever, then the federal government will soon be writing your newsletter, selling you a new car, servicing your old one, mowing your lawn, selling you shoes and hankies...you get the picture.

To make radical program eliminations based in the current capital market crunch is a fool's game. There is a reason most of federal student loans have been made, and continue to be made through FFELP: banks and guarantors do a better job , in a competitve market, making and servicing loans and helping borrowers than the federal government monolith does.

And, if the cockemamie federal accounting rules were ever brought into reality and all direct loan costs were counted, FFELP would be shown to be no more expensive than DL.

But, hey, pay no attention to the DL administrative costs that aren't included on cost comparisons, and to the fact that every year, OMB raises its DL cost estimates and lowers its FFELP cost estimates once the actual numbers come in; or to the fact that OMB data show that lifetime cohort default rates for DL are higher than for FFELP (remember in 1993 when DL supporters vowed there would be no defaults under DL?)...or to the fact that going all DL will increase the federal debt by $100 billion per year, even after the credit markets improve and lenders have money to lend,...etc.

The "let the feds do everything" fever, perhaps led by decendants of the Jim Jones Coolaid swallowers, are going to wake up one day in a 1960's era East Germany-type USA and wonder, "How did we get here?"

Elimination of FFEL

Even the wildest of imaginations never speculated that eliminating FFEL will save what President Obama states. It is political bs. But it is a good move on his part to, tying an increase in Pell to the elimination of FFEL. It takes the steam out of some schools who would, and may still stand up and be vocal about the elimination of direct lending. We are becoming a socialistic society....more people want more and more from our gov't and the gov'teems inclined to continue giving our money away. For weeksw we have heard Obama and the democratic congress not that government has not done a good job lending and that the private sector is much better at most things than the gov't. So, do we have double talk, politics or do we have bs?

Student Loans

I keep reading articles pertaining to student loans hoping to see how the children of middle class families will be helped. Pell grants only help those who are from impoverished families. My daughter will be in so much debt when she finishes college because her parents supposedly make too much money to qualify her for financial aid. Where is the help for the kids whose parents can't afford to help them with college tuition because we are working hard just to keep our heads above water with the ever increasing costs of everything. It just all seems so unfair to me and no one ever addresses this problem.