NASFAA

Congress Blinks in Game of Chicken with Lenders

Ben Miller — Thu, 02 Apr 2009 20:13:00 -0400

On Monday, the U.S. House of Representatives gave in to pressure from the student lending community by agreeing to a one year postponement of the pilot PLUS loan auction that was slated to begin just under two weeks from now. The Senate is expected to follow suit.

Auction opponents are on the verge of winning the delay because they have threatened to not participate and have made claims that the competitive bidding process rests on too much uncertainty for all involved. We understand why these claims would resonate with lawmakers, but the facts of the auction process simply don't bear them out. Instead, the fear and panic raised by the auction's detractors resulted in an unnecessary game of chicken between lenders and Congress. It's clear who blinked first.

The House included the delay as part of legislation it approved on Monday that aims to make mostly technical corrections to legislation it passed last summer reauthorizing the Higher Education Act. The bill is still waiting on Senate action before it can head to President Obama's desk, though little opposition is expected.

Calls for the delay have come mostly from private lenders and the National Association of Student Financial Aid Administrators (NASFAA), parties that have opposed the auction since its inception as part of the 2007 College Cost Reduction and Access Act. While their arguments against the competitive bidding process have varied, most recently they have had four main talking points:

Lenders would not bid, leaving the system with a lot of uncertainty.
The auction would take too long to announce winners, bringing uncertainty for colleges putting together aid packages and families trying to take on loans.
The auction would lower subsidies for lenders, making it unprofitable to make loans.
Financial conditions make it too hard to bid on a long-term contract

While these arguments all make for good talking points, they are not all borne out by the facts of the PLUS loan auction. Let's take a closer look at these claims.

No Bidders Creates Uncertainty

Several big name lenders, including Sallie Mae and Nelnet, have announced over the past several weeks that they would not be participating in the initial round of bidding on April 15. The lenders' refusal to bid raised concerns that the auctions would fail in many states, and a lack of bidders would result in uncertain borrowing conditions for parents.

But this argument lacks merit for two reasons. First, the auction legislation provides for a lender of last resort that would make all PLUS loans in a state where there are no winning bidders. Under this setup borrowers would be guaranteed to receive their loans and would know exactly from whom they are borrowing. Second, states with no winning bidders and no lender of last resort just return to conventional PLUS lending, in which companies compete to make loans with a 97 percent guarantee against default losses and a typical subsidy rate. A complete auction failure across the country would leave the PLUS loan market completely unchanged. In that case, borrowers would be no more or less certain about receiving PLUS loans than they are in the current market.

Long Timeframe

Another common concern raised by auction opponents is that it would take too long to announce the winners, hindering efforts by schools to put together aid packages and parents to begin taking out loans.

But consider the actual timeframe involved. The auction was set to take place on April 15, less than two weeks from today. Winners would be announced nine days later, on April 24. In the meantime, the final round of college admissions letters did not even go out until the end of March or early April. Students then have until roughly the beginning of May to select their school. In other words, the PLUS loan auction winners will be announced before many students commit to an institution, let alone start the process of taking out loans.

Lower Subsidies Make Loans Unprofitable

As we've written previously, claims that the competitive bidding process would drive down lender subsidies to the point where making PLUS loans is unprofitable fail to consider the additional benefits winning lenders receive.

The two lenders with the lowest subsidy bid rates receive a higher guarantee rate against loan default (99 percent versus 97 percent) and do not have to pay the 1 percent federal default fee required of conventional PLUS lenders. Both of these benefits reduce the cost of a loan. As a result, if lenders were to submit subsidy bids at or around the current rate (3-month commercial paper plus 1.79 percentage points), then the auction could very well reduce their costs. And that's without taking into account ancillary benefits, such as the need to no longer employ large marketing and sales staffs to solicit more PLUS loan volume.

Financial Conditions

Unlike the other talking points, we are sympathetic to concerns by lenders that they may not have the financial capability to guarantee that they can make all of a state's parent PLUS loans for the next two cohorts of students. But winning lenders will still have the authority to sell their loans back to the Department of Education as they are currently allowed to under the Ensuring Continued Access to Student Loans Act. This authority expires after the 2009-10 school year, but it provides some cushion for lenders to figure out their financing.

More broadly, however, if lenders do not have the capital to fulfill their duties as an auction winner, then they should not bid. In a sense, the auction rewards those that that are in good enough financial standing to serve as a winning lender. And as we said before, if no one bids, the system reverts back to business as usual and no one is any better or worse off.

Why Delay?

So let's review. Worst case scenario, no one submits bids, and by April 24 we know that the market will continue to operate as it had. Parents will still have time to find loans before their children enter school in the fall and lenders' financing will be no different. If lenders and NASFAA are so sure that is what would happen anyway, why not just wait the three weeks and get proven correct instead of raising panic levels unnecessarily?

Whispering in the Ears of Aid Administrators

Stephen Burd — Wed, 18 Mar 2009 16:00:00 -0400

Warning, Arkansas Congressional delegation, you are about to start hearing from financial aid administrators in your state upset about President Obama's proposal to eliminate the Federal Family Education Loan (FFEL) program. If you listen carefully though, you'll notice that the complaints sound awfully alike. That's because they come straight from talking points provided by the Student Loan Guarantee Foundation of Arkansas (SLGFA), the state guaranty agency.

On Tuesday, the Arkansas agency sent out a special alert to college financial aid administrators in the state entitled "School Support Needed to Help the Federal Family Education Loan Program." The guarantor warns the college officials that urgent action is needed. "The budget process is moving very quickly, and it is critical that your Congressional members hear from you this week," the alert states. "If you do not have time to write a letter, please call and express your views" related to "the merits and benefits of FFELP."

But just in case the aid administrators who receive this message can't think of anything good to say about the FFEL program on their own, the Arkansas agency helpfully provides them with "information points that will help you craft your message." Among other things, the aid administrators are asked to tout "local services offered by SLGFA and its trading partners." And for those aid officers who are not sure who to contact, the guarantor is considerate enough to provide "the name, e-mail address, and telephone number for each of the education aides working for your Congressional delegation."

Now we don't know how successful this campaign will be. In the wake of the "pay for play" student loan scandal, we'd imagine that some aid administrators would be wary of being asked to do the bidding of their local guaranty agency. But such concerns don't seem to faze the Arkansas guarantor, which counts as one of its major accomplishments in 2008 that it helped staff both the state and regional associations serving Arkansas financial aid administrators. A Higher Ed Watch investigation last year found that 32 percent of individuals serving in leadership positions (board members and committee chairs) at the Arkansas Association of Student Financial Aid Administrators were members of the loan industry.

All this is to say that the Arkansas Congressional delegation better be prepared for the calls, e-mails, and letters it's about to receive. In that spirit, we thought it would be best for us to post the alert in its entirety so that the lawmakers and their staff members will know what exactly the guaranty agency is asking financial aid administrators to say:

School Support Needed to Help the Federal Family Education Loan Program (FFELP)

On Wednesday, March 4, 2009, SLGFA published its response to President Obama's budget proposal calling for the elimination of the Federal Family Education Loan Program (FFELP). During the update at our annual conference, we indicated that we would engage members of the financial aid community to communicate with our elected officials concerning the merits and benefits of FFELP. The budget process is moving very quickly, and it is critical that your Congressional members hear from you this week. If you do not have time to write a letter, please call and express your views. Included in this correspondence is a list of information points that will help you craft your message in support of borrower choice and continued local services offered by SLGFA and its trading partners. Also, included are the name, e-mail address, and telephone number for each of the education aides working for your Congressional delegation.

Information Points

The FFELP provides locally-based services and jobs in every state in this nation. FFELP participants provide outreach services and materials to schools, students, and community organizations to increase college-going rates and awareness about financial aid and improve financial literacy. These services are targeted to the needs of local populations. These benefits will be lost if the government is the only lender. The federal government does not offer comparable services.
For 43 years, the FFELP has fostered competition between student loan providers to offer benefits for borrowers and quality customer services, and for the past 15 years, this competition has expanded to include the federal government. Students and schools have benefited from the efficiencies developed in the FFELP because loan providers have a constant incentive to innovate and offer better and more convenient services.
Customized services have been developed by FFELP participants to increase delinquency aversion and reduce default. These initiatives differ from state to state and include peer assistant programs to educate students, early intervention programs to help high-risk borrowers, and specialized contact to help borrowers who have fallen behind in their payments. These local outreach efforts are particularly needed during these difficult economic times. The federal government does not offer these state-based, targeted delinquency aversion and default prevention services.
The FFELP embodies the suitable role of the government in facilitating the private sector to further the public welfare.Moving away from a model that provides reliable funding to students and families by leveraging private and nonprofit financing does not make sense. Even with the financial difficulties this nation is currently facing, not one student has been denied a student loan for the current and upcoming academic< year. Not only will the benefits of competition be lost if the federal government is the only lender, but it will also increase the public debt by roughly one-half trillion dollars over the next five years.
An increased federal investment should be made in the Pell Grant Program but the case for that funding can stand on its own. It should not be tied to purported FFELP savings.

[The letter then provides a list of the Arkansas Congressional delegation, along with contact information for the members' legislative aides.]

SLGFA would appreciate receiving a copy of the correspondence you send to any member of Congress. You may e-mail copies to SLGFA Policy ad Compliance Division Chief Compliance Officer Becky Collins. As has been stated, this does not have to be a one-sided debate. Let your voice be heard and help structure the future of FFELP.

Please Don't Make Us Bid on PLUS Loans!

Jason Delisle — Wed, 25 Feb 2009 21:30:00 -0500

Are private student lenders and their allies in the financial aid world thankful for the credit crunch? If they can use the market turmoil as an excuse to torpedo the PLUS loan auction set to begin this year, they may very well be.

The student loan industry and their friends in the national and state associations representing financial aid administrators are calling on Congress and the Obama Administration to postpone or eliminate the new pilot auction program, arguing that current financial market disruptions would make it unworkable. They also argue that the program, which would use market forces to set student loan subsidy rates for lenders making federal PLUS loans to parents, won't reduce costs for the government.

Policymakers should bear in mind a few key points when considering the loan industry's latest cries.

Credit market disruptions have made the whole Federal Family Education Loan (FFEL) program structure 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 convert them into direct loans, as well as to lend federal money to FFEL lenders. The auction as designed may very well be an awkward fit within this new FFEL paradigm.

Yet, where there is a will, there is a way... to make the auction work. The ECASLA programs are a perfect example of how creative policies have been implemented to ensure the FFEL program continues to function in the face of credit market turmoil. These policies, however, are possible only because of the cooperation and support of the student loan industry, the Congress, and the Administration.

We don't doubt that these groups could find a way to make the auction work under the new FFEL structure and credit market environment. For starters, Congress could enact legislation increasing or removing the arbitrary cap on the subsidy bids lenders are allowed to make under the pilot auction program.

Policymakers should know, however, that such cooperation is unlikely, as the loan industry opposed any auction even before Congress had drafted its first proposal in early 2007. In fact, the lenders' concern about credit market conditions is largely a smokescreen. Lenders fear an auction because they would have to bid for the federal subsidies that they receive for making FFEL loans. This would require that they tip their hand and show the federal government and taxpayers what an appropriate subsidy rate really is. Moreover, the least efficient lenders would be squeezed out of the program. (Gee, imagine that.)

The industry's claims regarding auction costs savings are also a straw man. The auction program isn't so much about reducing costs as it is about getting student loan lobbyists and the Congress out of the business of setting subsidy rates. This model for setting loan subsidies is a terribly inefficient policy and one that we have criticized in a number of posts (available here, here, and here). Bear in mind, even if the auction increases costs for taxpayers, it is still superior to the existing subsidy setting approach.

The FFEL program wasn't designed to work under current credit market conditions. But the loan industry, of course, didn't argue that we should abandon the FFEL program or "postpone" it. Instead, they helped Congress and the Bush Administration design a solution. Why then should the auction be postponed or abandoned?

NASFAA's Misplaced Priorities

Ben Miller — Thu, 20 Nov 2008 17:39:00 -0500

The National Association of Student Financial Aid Administrators (NASFAA) is at it again -- raising panic levels to pressure policymakers to provide a massive bailout of the student loan industry. This time, the group's focus is on ensuring that lenders and colleges can continue to offer expensive private loans to high-risk borrowers.

On Monday, NASFAA President and CEO Phillip Day (pictured) sent a letter to both Treasury Secretary Henry Paulson and Education Secretary Margaret Spellings asking for their assurances that they will use a portion of the $700 billion bailout package to provide liquidity to companies that make private student loans. Praising the efforts Congress and the Bush administration have made to assist lenders that participate in the Federal Family Education Loan (FFEL) program, Day urged Paulson and Spellings to take "similar effective actions to ensure credit financing is available for those private educational loan borrowers that need it in order to pay postsecondary education expenses."

"Surely," he continued, "private education loans must be considered ‘troubled loan assets' and action is needed to correct this marketplace dysfunction." [The bailout package Congress approved in October gives the Treasury Secretary the authority to purchase "troubled assets."]

We agree with Day that private student loans are troubled loan assets -- for many of the financially needy borrowers who take them out. As we've written repeatedly, private loans are the most toxic form of student debt available with their high variable interest rates and lack of basic consumer protections. As with subprime mortgages, the lowest income borrowers are often stuck with the highest rates and the worst terms on these loans. And borrowers who have difficulty repaying the loans often have no way out - as private student loan providers have been uniformly inflexible in offering repayment relief. In addition, federal law makes it extremely difficult for financially distressed borrowers to discharge private loans in bankruptcy.

None of this seems to trouble Day. Instead, his sole concern is that the flow of private loans continues unabated. "Without government intervention and correction of this aberration, countless students will be denied the financing they need to reach their higher education goals," he wrote.

Day, however, is grossly exaggerating. For one thing, only about 8 percent of last year's college graduates held private loans, according to the Project on Student Debt. The vast majority of students who take out loans to pay for college get them through the federal loan programs.

Undergraduates who take out private loans tend to be concentrated at high-priced private colleges and for-profit trade schools. Now Day is correct in noting that lenders are imposing stricter credit requirements on students and are requiring students with less-than-stellar credit to have their parents co-sign the loans. But is this really a bad thing? For too long, schools and lenders engaged in sweetheart deals that made it too easy for them too load up students with excessive amounts of debt. Is it any wonder that delinquencies and defaults on these loans are growing dramatically?

Rather than lobbying administration officials to reinstate a potentially dangerous debt instrument, NASFAA and its members would better serve students by redoubling their efforts to make sure borrowers exhaust the still widely available federal loans. There is substantial evidence that many students and families fail to exhaust their federal loan options (including the still widely available Stafford loans and PLUS loans, which cover up to cost of attendance) before turning to more expensive private loans. For example, they could urge members to do what Colorado State University and Barnard College did -- require conversations with borrowers before certifying private loans. These programs led to significant decreases in private loan borrowing at both schools, as students became aware of their federal loan options. This was even true at Barnard where the complete cost of attendance is over $50,000.

NASFAA members could also reexamine their own institutional aid policies to make sure that their precious dollars aren't going to "merit aid," but are instead helping needy students. That would ensure that students who can ill afford private loans won't be forced to take them out so that their schools can recruit wealthier students.

Either way, it's extremely unfortunate that NASFAA isn't focusing its efforts on trying to reduce students' reliance on private loans. Instead, the group seems only too willing to help the lending companies continue to heap this high-cost debt on students.

Direct Lending On the Rise

Stephen Burd — Thu, 13 Nov 2008 17:43:00 -0500

Here's something that we never could have predicted: President Bush is leaving the federal Direct Student Loan program in a stronger position than he found it.

Back in January 2001 few student-aid observers thought that Direct Lending, which had been championed by the Clinton administration and Congressional Democrats, would survive the Bush presidency. Some loan industry lobbyists were so confident of the program's demise that they actually advised the administration to show restraint. "It would be foolish for the Bush administration to try to eliminate direct lending," Jeff Andrade, an advocate of the Federal Family Education Loan (FFEL) program, told The Chronicle of Higher Education shortly before Bush was sworn in. "The program is withering on the vine on its own." [Andrade soon after received a plum assignment at the U.S. Department of Education.]

Now, nearly eight years later, the Direct Loan program's fortunes are on the rise. In the wake of the credit crunch, the program's volume has increased by nearly 50 percent this year, according to the Education Department. Roughly 400 schools have switched to Direct Lending from the competing Federal Family Education Loan (FFEL) program over the last 12 months, bringing the total number of schools offering Direct Loans to about 1,370. If the program's growth continues at its current pace, Direct Lending will overtake the FFEL program for the first time in the program's history. [An additional irony is that, as a result of the credit crunch, the FFEL program is looking more and more like direct lending -- with the federal government providing federal capital and liquidity to struggling lenders to make federal loans.]

Despite the dire warnings from the loan industry and their allies at the National Association of Student Financial Aid Administrators, the transition by schools to Direct Lending has gone extraordinarily smoothly. This is true at even the largest colleges, like Pennsylvania State University, which has disbursed more than $100 million in Direct Loans for students this semester. "It was a big undertaking making a decision in March to be disbursing through Direct Lending by July 1," Anna Griswold, Penn State's financial aid director, recently said. "I think the fact that we accomplished our entry into Direct Lending in four months speaks volumes about the program."

Even once fierce skeptics of the Direct Loan program are now embracing it. "I was quite apprehensive about this switch. I have been in this business for 25 years and have been a strong advocate for FFEL. I do not resist change but this was a BIG switch for me," Walter O' Neill, the assistant vice president for financial aid at Roosevelt University, recently wrote on an online message board for financial aid administrators. "I can honestly tell you that it was one of the smoothest and trouble-free conversions that I have experienced."

Much of the credit for the smooth transition goes to the Bush administration, which despite its close ties to the loan industry, has lived up to its promise to manage the operations of the program effectively.

And Direct Loan advocates can take heart -- they will soon have a staunch ally in the White House. Early in his campaign, Obama proposed eliminating the FFEL program and providing federal loans entirely through the Direct Loan program. It is not clear whether or not he will follow through with this proposal or not as he has remained silent on this proposal ever since the credit crunch hit. This is probably not a fight he'll want to pick early in his presidency, with all the other daunting challenges awaiting him.

As we have stated previously, we hope that the Obama administration will lead the way on student loan reform to make sure the programs are operating as efficiently and effectively as possible. There are still deep-seated conflicts of interest built into the FFEL program that need to be uprooted (see the relationships between guaranty agencies and lenders, for example).

We would also urge the incoming Democratic administration to make sure that the Direct Loan program doesn't rest on its laurels. If the Education Department drops the ball -- as it did toward the tail end of the Clinton administration -- and lets service to schools and students suffer, colleges won't stick with it.

The tables have turned for now. But if we've learned anything from the resurgence of Direct Lending, you can't take anything for granted.

A Convenient Scapegoat for the Loan Industry

Stephen Burd — Tue, 21 Oct 2008 17:42:00 -0400

The Bush administration and lawmakers from both political parties are continuing to look for ways to help struggling student loan providers. While students haven't experienced any problems obtaining federal loans, lenders are still having trouble coping with the turmoil in the financial markets.

Before providing any additional help, however, policymakers should take a step back and consider how we got into this mess. For years, student loan providers have relied on the asset-backed securities market to finance their loans. That market has become dysfunctional and now most lenders are only able to continue making Federal Family Education Loans with liquidity provided by the government.

The student loan industry is not completely blameless for the breakdown of investor confidence in student loans. While the greatest damage was done by mortgage lenders securitizing faulty subprime mortgage loans, student loan companies dumped plenty of high-risk private loans onto the marketplace (sometimes bundled with safer federal loans), knowing full well that some of this debt was likely to go into default.

While many lenders have gratefully accepted the government's help in financing their loans, they still don't want to shoulder any responsibility for their actions. Instead, they have identified a convenient scapegoat for their problems -- the sharp cuts Congress made to lender subsidies last year. As we've noted before, the loan industry has repeatedly tried to use the panic created by the credit crunch to pressure lawmakers into revisiting the subsidy cuts.

Nowhere has this line of argument been made more openly than by Higher Education Washington Inc. (HEWI), a pro-student loan industry publication that was founded by the chief counsel to the Consumer Bankers Association. Back in March, HEWI exulted "about increasing signs that at least some in Congress will attempt to revisit the College Cost Reduction and Access Act -- specifically, the elimination of $18 billion in subsidies to private lenders." Last month, the publication took a more somber tone, noting that recent revelations about the 9.5 percent student loan scandal would "make any effort to restore liquidity to the market by restoring subsidies to lenders...that much more difficult." [It's actually pretty silly to suggest that rescinding the subsidy cuts would somehow alleviate the problems posed by such extraordinary credit markets. The size of the subsidy cuts pale in comparison to the effects that the credit crunch has had on financing costs for the student loan market.]

While the loan industry has not made much headway in these efforts on Capitol Hill, they have been pretty successful in spreading this message through the news media. Reporters almost routinely cite the subsidy cuts as one of the causes of the lenders' problems when writing about the student loan crunch. Meanwhile, the conservative editorial board of The Wall Street Journal has had a field day attacking the Democratic-led Congress for imperiling students, "What's now clear is that Congress didn't merely wring the profits out of student lending," an editorial in April stated, "It's blown up the entire student loan market." [Gee, never mind that the entire banking system has suffered as a result of the credit crunch, which The Wall Street Journal has thoroughly covered in its news pages.]

But these arguments are largely specious. Don't get us wrong. Of course, some lenders stopped participating in FFEL because of the subsidy cuts. But that was to be expected, as any reduction in subsidies will shake out the least efficient providers.

The real source of the loan industry's troubles, however, is the overall lack of available credit in the financial markets. For years, lenders financed student loans by securitizing them. Just like mortgage companies, they bundled their loans together (sometimes including both federal and private student loans) and sold them to investors to raise capital. When the securitization market froze up largely as a result of the subprime mortgage crisis, student loan providers found themselves without the money they needed to make new loans.

But don't take our word for it. In a recent report on the student loan credit crunch, the National Association of Student Financial Aid Administrators (NASFAA), a group we don't always see eye to eye with, provided one of the clearest explanations for its origins that we have seen. "The student loan crunch originated with problems in the subprime mortgage industry," the report stated, adding:

[The failure of these subprime mortgage loans] made investors extremely wary of all asset-backed securities, even extremely safe investments like student loans, which are backed by the federal government. It became exceedingly difficult for lenders to auction bundles of loans because no one wanted to purchase them. Eventually, some student loan companies had to suspend lending because they were unable to raise capital to make new loans. The inability to auction bundled loans hit non-bank student loans providers especially hard because they cannot borrow money from the Federal Reserve to make new loans. Over the past six months, dozens of for-profit and nonprofit student loan providers suspended their student loan programs or tightened eligibility requirements, limiting who can borrow from them.

See, no mention of subsidy cuts. Even a group as closely aligned with the loan industry as NASFAA has not bought into this line of argument.

NASFAA's explanation does fudge one point: the student loan industry was not an innocent bystander. Lenders dumped plenty of high-risk private loans on the marketplace and sometimes bundled them with safer federal loans. This left investors understandably wary of investing in student loans, even ones backed by the federal government.

Loan industry lobbyists don't want to look in the mirror. Instead, they are busy looking for scapegoats.

Jason Delisle contributed to this report.

NASFAA's Clouded View

Ed Policy — Thu, 24 Jul 2008 22:54:00 -0400

By Ben Miller and Stephen Burd

As individuals on the "‘front lines" of the financial aid process, financial aid administrators offer an important perspective on the credit crunch's daily effects on student loan availability. As such, the results of a recent survey that the National Association of Student Financial Aid Administrators conducted of its members provide some interesting ground-level impressions of the credit crunch. Unfortunately, this viewpoint is almost entirely clouded by the 30,000-foot spin the organization's leadership has put on it. Needless to say, the association's close ties to the student loan industry remain firmly evident.

On its face, the survey suggests that immediate federal loan availability concerns have been largely satisfied, though worries remain about discriminatory lender practices (i.e. banks refusing to lend to students at community colleges and for-profit trade schools) and the long-term fiscal health of the student-loan market. The vast majority of respondents, for example, said actions that Congress and the Bush administration have taken in recent months have "eased the student loan crunch problem" for now. And only a relatively small proportion of aid administrators (about 25 percent of those surveyed) are worried enough that they have put contingency plans in place to prevent any disruptions in loan availability for their students.

That nuanced take is completely missing from NASFAA's spin on the survey. In a press release announcing its findings, the association twists the data into a picture of panic and a call for more action.

Case in point, the press release starts by stating that the "vast majority (90 percent) of student financial aid administrators said they are concerned about the student loan crunch." But look at the actual results: only 44 percent of the survey's 1,078 respondents reported being "very concerned" about the credit crunch. Another 46 percent said they were "somewhat concerned," but there's a big difference between being "somewhat" and "very" concerned about an issue. Lumping the two together is misleading, if not disingenuous.

Perhaps a better way to gauge aid administrators' level of concern is whether they have an emergency backup plan in place for loan availability. According to the survey, the majority of respondents (54 percent) said they didn't believe that having such a plan was necessary. But in its press release, NASFAA glosses over this finding. Instead, it focuses on the fact that only one quarter of respondent institutions currently have some alternate strategy for loans in place. This gives the reader the misleading impression that most schools are unprepared for possible problems, potentially leaving students in harm's way.

At first glance, NASFAA's decision to sound the alarms now is curious, especially when the report itself acknowledges that the responses the government has taken to the student-loan credit crunch "are having a positive effect." The report notes that some lenders that had stopped making federal loans earlier this year have reentered the market and that the Department of Education has "stepped up its efforts" to streamline the process it uses to transition schools into Direct Lending.

But the association clearly has an ulterior motive -- to persuade federal officials that a crisis still exists and that more needs to be done to help lenders in the Federal Family Education Loan (FFEL) program weather the storm. The group makes that clear when it states in the first sentence of its press release that "more than half of respondents (52 percent) believe that the recently enacted Ensuring Continued Access to Student Loans Act does not do enough to ensure future loan access for students."

The association's stance is not all that surprising considering that the group has been one of the chief proponents of legislation that would provide the loan industry with an even larger bailout than Congress and the Bush administration have already provided. That bill, which, which has been championed by Sallie Mae and sponsored by the loan giant's favorite Democrat Rep. Paul Kanjorski of Pennsylvania, would allow the Treasury Department's Federal Financing Bank and Federal Home Loan Banks to inject cheap federal capital into the student loan market.

Progress on that legislation has come to a grinding halt, as concerns about the student loan crunch have eased on the hopes that the financial markets are beginning to stabilize. Without any proof that students' access to federal student loans is in jeopardy, federal officials are understandably reluctant to provide a potential windfall to the loan industry.

Facing that type of resistance, NASFAA is stepping up its efforts to rally support for the legislation. In a recent letter to Sen. Patty Murray (D-Wash.), Phil Day, the association's president, reaffirmed his support for the measure, saying that it would help ensure "that all eligible students are able to get the loans they need for school. "

The funny thing is that many of the aid administrators surveyed expressed concern about "inaccurate media reports that tend to scare families" about the availability of loans "rather than to inform or help them." Of course, NASFAA officials didn't highlight this concern in its press release. Because if they had, they surely would have had to come clean about why they are still pushing the panic button.

Higher Ed Watch Investigation: Student Loan Companies Infiltrate College Financial Aid Associations

Ben Miller — Wed, 11 Jun 2008 16:43:00 -0400

We have long been concerned about the close ties between the student loan industry and the National Association of Student Financial Aid Administrators (NASFAA), an organization that lobbies on behalf of college aid officials. These ties have been so strong in recent years that the group's policy positions on student loans have more often than not mirrored those of the Consumer Bankers Association and Sallie Mae.

NASFAA's leaders deny that lenders have influence over the organization's policy positions. In arguing this point, they often note -- as the group's former president Dallas Martin did in an interview with The Wall Street Journal last year -- that the association prohibits loan industry officials from serving on its national board or voting "on policy and membership issues."

What they fail to mention, however, is that these rules do not apply to the organization's state affiliates and regional associations. In fact, by most accounts, these groups depend heavily on student loan providers for both leadership and financing.

At Higher Ed Watch, we set out to investigate the extent of lenders' involvement in NASFAA's state affiliates. We looked at the membership of the organizations' executive boards, committee chairmanships, and equivalent leadership positions. We were able to obtain data for 37 of the 49 state chapters (Delaware, the District of Columbia, and Maryland have one group). Password protections and nonfunctioning websites prevented us from being able to access information on the other 12 chapters.

The results are striking. All told, of the 892 individuals serving in leadership positions at these 37 state affiliates during the 2007-08 academic year, 170, or 19 percent, were members of the loan industry.

In some states, these ties are particularly strong. For example, in four states, loan industry officials were actually in charge of the NASFAA affiliates. In Rhode Island, the president of the Rhode Island guaranty agency served as the state chapter's president, while the leader of Rhode Island's state-affiliated non-profit lender served as its treasurer. Officials with American Education Services, the Pennsylvania Higher Education Assistance Agency's national brand, led the Delaware and the District of Columbia affiliates. An official with EdFund, a national guaranty agency based in California, was the Maryland chapter's president.

Even if not run by lenders, some state affiliates have a particularly strong lender presence. For example, at NASFAA's Arizona chapter, loan industry officials make up 48 percent of board members and committee chairs, including the organization's treasurer, treasurer-elect, and the co-chairmen of the membership, state legislative affairs, and newsletter committees. The joint DE/DC/MD group also contains a large number of lenders, with loan company officials making up 45 percent of its leadership positions.

In total, only five of the 37 state financial aid officer association affiliates had no lenders in leadership positions, while 13 had at least one-quarter of their leaders come from loan companies. (The table below shows the proportion of lenders in leadership positions at each of the state chapters.)

In addition to occupying major leadership positions, lenders can also assert their influence via corporate sponsorship of websites, newsletters, and the associations' annual conferences. For example, 12 state affiliates display ads for loan companies on the main page of their website. Of these, Georgia's state chapter had the most sponsors, with ads for 11 different banks and loan companies.

The powerful role that the loan industry has played in helping lead and finance these organizations can be seen in the stances they have taken on some of the most controversial loan issues in recent years. Many of these state financial aid officer groups helped lead the opposition to the Student Aid Reward (STAR) Act, a bipartisan bill that would have rewarded colleges that entered the Direct Student Loan program with additional need-based grant aid. Schools and students participating in the Federal Family Education Loan Program would have lost nothing.

State financial aid officer organizations also bitterly opposed efforts by New York State Attorney General Andrew Cuomo, Congress, and the U.S. Department of Education to strengthen regulations that forbid student loan providers from offering illegal inducements to colleges to secure applicants for federal loans and require colleges to include a minimum of three lenders on their preferred lender lists.

Some state chapters even received a reprimand from NASFAA's leadership for pushing a proposal, championed by the loan industry, to raise the interest rate on PLUS loans taken out by parents and graduate students through the Direct Loan program.

NASFAA's leaders know that the ties between lenders and its state affiliates are problematic, but they don't seem to know quite what to do about it. In a recent interview with Higher Education Washington Inc., Philip Day, the association's relatively new president, talked of "a candid conversation" he recently had with the leaders of the group's state and regional chapters: "They need to start reassessing the extent, and I think most of them are, to which they allow representatives of lending institutions to be engaged in the governance structure, particularly in leadership roles, of their regional and state associations."

At Higher Ed Watch, we believe that stronger action is needed. At the very least, the state chapters should be held to the same standards as the national organization -- meaning that lenders should be barred from holding leadership roles and voting on policy issues. And frankly, they should stop accepting student loan bank money as well. Only then will the organization as a whole begin to represent all student financial aid administrators, not just those at schools participating in the Federal Family Education Loan Program.

Stephen Burd contributed to this report.

NASFAA's New Chief Is No Aid Expert

Stephen Burd — Thu, 29 May 2008 15:51:00 -0400

Shortly after being named the new president of the National Association of Student Financial Aid Administrators, Philip Day said in an interview that he was not interested in becoming a student aid expert.

"One of the questions I got in my interview is, "how long do you think it will take you to get up to level of technical speed?'" Day told The Chronicle of Higher Education. "I said, 'I hope never.' Because I think that's not what this institution needs now. What they need is somebody who can advocate and focus on issues at the 10-to 15,000-foot level."

Judging from a more recent interview that Day gave Higher Education Washington Inc., a publication owned and run by a top student loan industry lobbyist, NASFAA's new chief seems to be succeeding. As we noted yesterday, the interview shows that Day is not only ill-informed, but also, in spite of last year's revelations in the student loan "pay for play" scandal, NASFAA has not changed its stripes. The views that Day expresses on federal student loans in general, and the Direct Student Loan Program in particular, are confused and misleading, and reflect a strong bias in favor of the Federal Family Education Loan (FFEL) program.

Some of Day's comments are just flat out wrong. For example, when asked about the likelihood of colleges switching to Direct Lending as a result of the credit crunch, Day claims that Education Secretary Margaret Spellings has said that "the most she can do is double the size of the Direct Loan Program." What Spellings has actually said is that is that the Department of Education can immediately double its capacity and increase beyond that limit in fairly short order if necessary.

On the same subject, Day suggests that colleges may run into difficulties switching from FFEL to Direct Lending because making the transition is "not set up to be easy." On the contrary, with the advent of the Common Origination and Disbursement system, any school that participates in the Pell Grant program will find it fairly easy to originate Direct Loans and draw down federal funds from the Department of Education. Now don't get us wrong, there are probably ways that the Department can speed up the process for certifying a school for Direct Lending. But in reality, the process is not overly burdensome.

Other comments by Day are downright bizarre, and show that he does have a lot to learn. We've included a couple that we found particularly disturbing below (in bold and italics) with our responses.

Questioning why policymakers would encourage colleges to enter direct lending, Day asks, "With all the problems this country has with the level of its debt, why would they want to transfer a level of liablity and debt off of the private sector's books onto the public sector's books, at a level of $50 to $60 billion a year, and then over the lifetime of those loans, it could reach $500 billion?"

Even if you don't want to accept the finding of the Bush Administration's Office of Management and Budget and the Congressional Budget Office that brand new Direct Loans issued to new borrowers are cheaper for taxpayers than FFEL loans issued to new borrowers, Day's answer demonstrates a stunning lack of understanding of how the government accounts for its loan programs. Under FFEL program, the "liability" of the federal government is virtually the same as it is in under the Direct Loan program. The government currently provides FFEL lenders with a 97 percent guarantee against default losses, just 3 percentage points below Direct Loans, which effectively have a 100 percent guarantee. Liability for defaulted loans rests with the taxpayer in both loan programs, not on "the private sector's books."

Day warns that colleges that enter Direct Lending are at risk of exposing themselves to much greater government oversight and intervention. "The other factor that people will you about as to why people have hesitancy about moving from FFEL to Direct is that they don't trust the federal government," he says. "He who controls the purse strings, controls the programs...particularly with the increased emphasis on accountability and control." He goes on to say that if there is a substantial increase in volume in Direct Lending, the likelihood of Congress extending the No Child Left Behind law to colleges would increase significantly.

Really? Schools aren't entering the Direct Loan program, because they're scared of the government? So why are they participating in the Pell Grant program, the Supplemental Educational Opportunity Grant program, or the FFEL program for that matter?

The government has no more control over a college that participates in the Direct Loan program as compared to FFEL program or any other federal financial aid program. Colleges may be unhappy by some of the restrictions that the government places on them writ large, but few and far between are willing to sacrifice eligibility to receive all federal student aid dollars.

What Mr. Day doesn't seem to understand is that FFEL program is just as much a government program as Direct Lending. If the government officials were truly intent on imposing "a post-secondary version of NCLB" -- which seems like a straw man argument -- it could do so regardless of the loan program in which colleges participate.

Day may not want to be an expert on all of the intricacies and details of student aid policy. But he should at least study up a little so that he has a better idea of what he's talking about. Until then, it appears that he will accept any line that the loan industry and other die-hard opponents of direct lending throw his way.

The nation's financial aid administrators -- all of them, not just those at FFEL schools -- and the higher education community deserve better.

The Honeymoon is Over

Stephen Burd — Wed, 28 May 2008 15:55:00 -0400

Up until now, we've been willing to give Philip Day the benefit of the doubt.

In March, Day, the former chancellor at the City College of San Francisco, became the president of the National Association of Student Financial Aid Administrators (NASFAA), a group with such strong ties to the student loan industry that in recent years its policy positions have closely mirrored those of the Consumer Bankers Association and Sallie Mae.

At Higher Ed Watch, we have been critical of NASFAA in the past. We were hopeful, however, that the organization's first presidential change in its 32 year history -- coming on the heels of reforms imposed on NASFAA by New York State Attorney General Andrew Cuomo that cut into the financial support the group receives from loan providers -- would set the association on a new track.

We were especially encouraged by statements Day made shortly after accepting the job. In January, he told The Chronicle of Higher Education that NASFAA needed to "reassess" its relationship with lenders. "It's something I don't feel 100 percent comfortable with," he stated. Amen to that.

But Day changed his tune after his comments caused a minor backlash among supporters of the Federal Family Education Loan (FFEL) program within the organization. In a letter to NASFAA members, he took himself and others to task for making statements that "cast the association in a negative light."

And once Day formally took charge, it quickly became clear that our hopes have been misplaced. NASFAA continues to push policy proposals favored by lenders. The group, for instance, has been a lead player in trying to persuade federal policymakers to block state officials from policing the student loan programs. [Take that, Attorney General Cuomo!]

In addition, Day has been one of the chief proponents of legislation, which has been championed by Sallie Mae, that would provide an even more substantial government bailout of the loan industry than the Department of Education supplied to student loan providers last week. Keep in mind that not one student has gone without access to a federal student loan. And yet, Day, without any special knowledge of markets or it seems federal student aid, is calling for additional new subsidies to the lending industry.

Despite our disappointment, we had not planned to voice our concerns. After all, Day is still new, and his policy positions could evolve. But after we read this interview he gave Higher Education Washington Inc. (HEWI) a publication owned and run by a top student loan industry lobbyist, we realized we had no choice.

The interview shows that Day is not only ill-informed, but that NASFAA, in the aftermath of last year's "pay-to-play" student loan scandal, has not changed its stripes.

In his remarks, Day argues that the scandal was overblown. "You get generalized that this is a problem for the whole, when you've really got a problem with just a few," he said.

Actually, what the loan scandal really showed was that lenders were routinely providing gifts, payments, and other inducements to colleges with the express intent of getting schools to steer borrowers their way. We're not just talking about a few isolated cases. We're talking about how business was routinely conducted.

Don't just take our word for it. Ask Walter O'Neill, the assistant vice president for financial aid at Roosevelt University, who has long been a fervent supporter of FFEL. In an impassioned e-mail on a message board for financial aid administrators, he recently expressed his disillusionment with the loan industry and revealed the "ugly reality" behind lenders' dealings with colleges. "We have seen where their priority is and it is not 'students first' unless it is profitable to do so," he wrote. "All of the outreach, cute little scholarship programs, participation in professional organizations and college fairs were all for the bottom line, my friends."

In light of all the controversy the scandal created, Day acknowledges to HEWI that "we need to reassess and reevaluate things." But he cautions against going too far for fear of driving lenders away. "If the student lenders and everybody who's in that business suddenly decided to fold up the tent and go home, the whole student aid program in this country would collapse."

He concluded the HEWI interview by saying, "It's important to have an arm's length relationship but at the end of that arm is another arm that's being extended and we join hands in trying to continue to work together and address the needs of our students."

Or in other words, the new boss sounds a lot like the old boss -- except the new one knows a whole lot less about how the student aid programs actually work.