Senator Gregg Helps Expose Student Loan Industry Falsehood

"...unsubsidized Stafford loans generate a small amount of revenue, according to the Congressional Budget Office."--Press release from the office of Sen. Sherrod Brown.

The post states:
"Rather, students will get loans at terms more generous than those offered in the private market, which results in a cost to the government."

So please tell me, who again is engaging in half truths?

I'm willing to examine this further, say by checking out OMB's or CBO's figures on subsidy rates, but the tone of this post would suggest that it is very difficult to look at the budget numbers without talking down to people and nobody likes that.

What kind of a bank walks away from a government program offering billions in subsidies with no risk? Answer: A bank like Key Bank. Apparently its CFO didn't realize it's participation in the FFEL program involved huge government subsidies. The bank annnounced it's exit from FFEL yesterday, apparently before it had a chance to read this blogger's latest posting.

We don't expect Key shareholders to sue the company or its management for mismanagement and cite NAF's blogger as evidence. The reason is that this particular blog entry doesn't make sense.

CBO wrote Senator Gregg to tell him that the cost of using federal capital for student loans was higher than reflected in the offical CBO cost estimate because the risk that borrowers might not repay their loans isn't adequately considered under the official Credit Reform Act budget scoring methodology. Because in the FFEL program, lenders absorb 3 percent of losses on defaults, the government's risk exposure on FFEL loans is less on FFEL loans than on Direct Loans. CBO director Elmendorf also said that.

As many legislators are starting to realize, the "savings" resulting from the Obama plan represent the difference in the presumed profits in the Direct Loan program versus those to be earned by the government in the FFEL program. In the case of both program, student loan borrowers will be paying for part of the increase in the maximum Pell Grant as well as for other "education funding priorities," some of which have nothing to do with higher education.

Profits are calculated in the Direct Loan by identifying the presumed cost of the capital used for making loans and netting it against the income to the government on the loans made (borrower interest payments) and the cost of default losses (albeit apparently under-estimated). In the Direct Loan program subsidies to borrowers, such as the payment of interest on behalf of borrwoers during in-schol and deferment periods, reduce the government's income.

In the FFEL program the government's profits (or costs) are calculated by comparing what the government pays to lenders in the form of payments made on defaults (in form form of reinsurance payments to guaranty agencies that support insurance payments to lenders) and in the form of interest payments to or from lenders (called special allowance) and interest subsidies paid to lenders on behalf of borrowers (the in-school interest subsidy and interest subsidies during borrower deferments). As has been well-documented, lenders are currently paying a negative special allowance--rather than receiving money from the government, they are cutting checks reflecting the difference between the presumed interest paid by the borrower and the statutorily defined return to lendres (currently 2.08 percent).

On an unsubsidized FFEL Stafford Loan, the government currently remains liable for 97% of borrower defaults but received payments from the lenders for 4.42 percent on an annualized basis.

The bottom line: According to CBO and OMB (but not NAF), the government can make Direct Loans to borrowers and pocket a large profit. The same two agencies suggest that a profit will also be earned on FFEL loans, but at a lower level.

Is the difference between the government's profits on Direct Loans as compared to FFEL loans a subsidy to lenders? NAF says it is, but does it really believe the subsidy goes to bank profits as it and the Obama adminstration imply? Apparently, yes.

It gets worse. The NAF blogger also believes the borrower services paid for by lenders and guarantors in FFEL have no value and apparently believes taxes paid by lenders on their profits should be "outside the analysis."

So, how do you reconcile this blogger's wierd analysis with the reality that lenders are quitting the FFEL program because the return earned is inadequate? The answer is that because NAF's blogger believes there is no difference in the government lending money in Direct Loans and guaranteeing a loan using private capital (even with 3% risk-sharing) in FFEL, it believes lenders are being subsidized even though those subsidies do not translate in lender profits.

It defies logic to suggest that a borrower of a 6.8 percent student loan made by the federal government doesn't produce a profit for the government. Yet that's what this blogger would have you believe.

One final thought: Is it necessary to call people that disagree with NAF and the Obama administration liars?

There will not be 87 billion dollars in savings form SAFRA; everyone knows that, and everyone who wants to ram this through wants to delay the requsite re-scoring. And the savings comes on the backs of student in the interest rates charged to students, versus the rate of borrowing by the federal treasury.

The for profit lenders who are now the DL servicers have cut a back office deal, the non profit lenders who provide access and outreach services will loose significantly (spare me the 9.5 floor angst, bloogers..over and done). This was a well timed campaign to shut down FFEL, beginning several years ago, with the zealot fervor akin to religious fever.

Senate HELP is now going to delay the SAFRA bill (but under the Senate's new name for the bill..wouldn't want to keep it the same so we all could follow it...) until late November or December, so FFEL schools had darn well better begin switching to DL now, or it will be too late. And they probably won't extend ESCALA, so lenders won't have access to capital anyway, schools, so you'd better switch now. Feels a little like insider trading...

So DL for all is inevitable. But P.S. accountability reigns; I wonder if schools will be asked in the future to pay a default fee if the graduation rate doesn't meet certain bench marks?

Now maybe the powers that be (i.e., Democrats that are smarter than the average college student/consumer) can go after Abercrombie & Fitch for selling college students $100 jeans and hoodies at 90% margins. Or campus bars for allowing college students to spend their hard-earned Title IV proceeds on liquor and fried food. Or AT&T for locking doe-eyed 17-year olds into $130/month service contracts for unlimited voice & data cellular service.

Face it, Dems, you used a few bad apples (c.f. Ellen Frishberg) to railroad FFELP into a landfill, and you will have helped NO STUDENT anywhere in doing so. Now go help even fewer students by attacking credit card companies and sidewalk lunch vendors on campuses around the country. LOL.

Jason, are you saying that if an amendment is accepted in the Senate cutting both Stafford and PLUS loan interest rates to exactly the government's cost of funds, the bill would still save $87 billion, according to CBO?

If that's the case, why haven't the Democrats done that already? Sorry, that's two questions. My bad.

CBO also estimated default costs. With FFEL, borrowers default at 270 days. With DL, it's 360 days. No wonder the savings under DL are higher.
The subsidies you talk about WERE SET AND APPROVED BY CONGRESS as are interest rates. I'm shocked that Congress always blames someone else. True fact is that the gov't will borrower the money at less than 1/2% and lend it at over 5%. This is where the true savings comes from. You can play the numbers game anyway you want to but this is the end result. Students who take out a DL will be paying for other students to receive Pell Grants, as well as additional funds to HBCU's and other colleges in the form of State grants. The savings are not paying down our sky-rocketing debt.
I really don't care that you dislike FFEL.But at least be professional and report the true facts.

I'm so glad that more corporate middle-men are being pushed out of the system. Now we need to axe Sallie Mae, and restore both the sort of funding higher education received back in the 1960's--when most students didn't have to take out loans, their tuition was low and covered by grants, and when their were standard consumer protections attatched to all student loans, so that their were no corporate billionaires profiting off of hapless young people.