House Republicans Still Confused About Student Loans

Jason Delisle — Thu, 17 Sep 2009 14:26:00 -0400

The House of Representatives is expected to approve a bill today that would eliminate the Federal Family Education Loan (FFEL) program, expand the Direct Loan program, and put the resulting savings into student grant aid. But before a final vote is taken, the loan industry's champions in the House will make one last ditch effort to gut the student loan reform bill. They are offering an alternative proposal that would keep the FFEL program running on arbitrary subsidies easily manipulated by the student loan industry, and ironically, expand the role of the federal government in the FFEL program.

Reps. John Kline, the top Republican on the House Education and Labor Committee, and Brett Guthrie (R-KY) plan to offer a substitute amendment to the bill that would keep the FFEL program operating just as it is today, but extend to 2014 the Ensuring Continued Access to Student Loans Act (ECASLA) programs that Congress approved in 2008 to keep student loan providers afloat during the credit crunch. In the meantime, the amendment would create a commission, with heavy representation from the loan industry, to design and recommend to Congress a new "private sector model for [government-backed] student lending."

The ECASLA programs -- which include put options, asset-backed commercial paper conduits, and government loans to lenders, all with their own set of arbitrary fees and interest rates -- represent a massive new undertaking by the federal government to help private lenders make FFEL loans. This new undertaking is in addition to the regular federal subsidies and guarantees granted to FFEL lenders that have proved inefficient and wasteful.

The irony, of course, is that Rep. Kline claims to be against 100 percent direct lending because he sees it as a government takeover of... well... a government program. Yet, he favors extending a massive new role for the federal government in the government program that is FFEL. But wait, there's still more irony. Rep. Kline proudly states that, according to budget estimates, ECASLA "is earning money for the federal Treasury."

But the estimate to which he refers was not done according to the Congressional Budget Office's "market risk" analysis that Kline himself says "shows tens of billions of dollars in hidden costs" in a move to 100 percent direct lending. Why doesn't Kline have the same cost estimate standards for his loan proposals? Higher Ed Watch bets it's because the reported ECASLA savings arise predominantly when FFEL loans convert to direct loans as they are sold to the federal government, and a "market risk" analysis would find the same hidden costs "lurking" in his own proposal.

It's another confusing day indeed for House Republicans and FFEL program supporters.

Naughty and Nice

Ed Policy — Thu, 18 Dec 2008 19:23:00 -0500

It's undeniably been a busy year for higher education with financial crises, continued student loan controversies, and the Higher Education Act finally renewed after more than five years of deliberations. With Santa coming to town at the end of next week and Higher Ed Watch taking off for the holidays, it's time for us to take a look at who was naughty and who was nice in calendar year 2008.

NAUGHTY

The State of New York. In January, the Empire State unveiled an ambitious plan to boost its public colleges and universities by creating an endowment and hiring more faculty members -- that was nice. But now facing revenue shortfalls and a sagging economy, the state is considering taking the budget axe to its public college and university systems. With the governor proposing over $350 million in cuts in spending on these colleges, students are expected to face significant tuition increases, including one early next year. Sadly, New York isn't alone in this inglorious honor -- California, Virginia, Pennsylvania, and others are all looking to slash spending on higher education.

Student Loan Panic Raisers. Makers of high-blood pressure drugs and antacids probably earned a fortune off of close followers of the student loan market this year. When credit and asset-backed securities markets froze, a few organizations, newspapers, and even some members of Congress, began spreading panic and hysteria throughout the public sphere. Groups such as the Career College Association and the National Association of Student Financial Aid Administrators dramatically increased panic levels with their unwarranted doom and gloom prognostications of widespread federal student loan shortages. In the end, no student went without a federal loan.

The football teams of the Universities of Oklahoma, Florida, Texas, and Oregon. These schools all may have done well on the gridiron this year, but they leave something to be desired academically. Florida and Oklahoma are headed to the BCS National Championship game, yet both schools graduated just 36 percent of their players within six years. Texas, meanwhile, graduated a paltry 27 percent of its black players, the worst mark among all teams currently ranked in the BCS top 25. Rounding out the underperforming lot is Oregon, which had a shocking 41 percentage point gap between the graduation rate of its white and black players. These schools clearly need to put a lot more emphasis on the classroom.

Subprime Private Student Loan Providers. This is the year that subprime lending by private loan providers came back to bite the student loan industry. Of particular concern have been the sweetheart deals that lenders such as Sallie Mae have forged over the last decade with some of the most scandal-ridden chains of for-profit colleges to provide high-cost private loans to students who wouldn't otherwise qualify for them because of their subprime credit scores. By all accounts, delinquencies and defaults on these loans have grown alarmingly, forcing the company to spend hundreds of millions of dollars to cover losses on these bad loans. Meanwhile, the company has done little, if anything, to offer relief to these borrowers. Sallie Mae has not been the only bad actor. In recent years, lenders like KeyBank fueled the growth of unlicensed and unaccredited trade schools by providing private loans to the at-risk students these schools tend to attract. Many of these schools have shut down unexpectedly, leaving their students heavily indebted and without practical training. Meanwhile, these lenders have refused to discharge these loans - in violation of at least the spirit of Federal Trade Commission regulations. Hopefully, the incoming administration will put an end to these types of harmful practices for good.

NICE

State Oversight Officials in New York , Pennsylvania, and Iowa. Showing leadership largely missing from federal regulatory agencies, state attorney generals and other oversight officers were producing critical reports or wrangling settlements from lenders engaging in improper and sometimes illicit student loan activities. Following up on his work last year to expose abuses in the federal and private loan programs, New York Attorney General Andrew Cuomo reached a number of settlements with lenders this year over charges that they had engaged in deceptive marketing practices, and is still digging into the marketing of credit cards on college campuses. Meanwhile, Iowa's attorney general released a report in October exposing how Iowa Student Loan Liquidity Corporation (ISL), the state's nonprofit lender, intentionally engaged in "hypergrowth" to enlarge its private loan volume, and helped make the state's college students the most indebted in the country. Also this year, Pennsylvania State Auditor Jack Wagner released an audit of the Pennsylvania State Higher Education Assistance Agency (Pheaa) that found the nonprofit lender and guaranty agency had structured its board to gain undue political influence, and often acted in its own benefit, rather than that of Pennsylvania's students. All of these state reports and actions helped shine a light that has been missing, or much too weak, from the federal level.

Direct Lending. Though often maligned by those spreading panic about federal student loan availability, the Direct Loan program ended up serving as a crucial backstop to the FFEL program. More than 400 schools switched into the Direct Loan program in the past year, increasing its total volume by 50 percent. Not only did the growth prove critics wrong by happening in a swift and efficient manner, but it was done without reigniting longstanding debates about which loan delivery system is better.

The football teams of Boston College and Northwestern and Penn State universities. Unlike the teams mentioned on the "naughty" list, these squads all performed admirably in the classroom. At 88 percent, Boston College's football graduation rate is 10 percentage points higher than any other team in the BCS top 25. Northwestern, meanwhile, graduates its black football players at a higher rate than its white players. Penn State graduates its black football players higher than the overall university's black students. These schools have all shown that on-field and in the classroom achievement are not mutually exclusive.
Congress. The final Higher Education Act reauthorization bill was not a page-turner to read, but it did include some important consumer protections for private loan borrowers and some helpful steps to eliminate the types of "pay for play" conflicts of interest that we helped expose last year. Lawmakers did not go nearly far enough in addressing these issues but at least they took a first shot. Now about that bankruptcy provision...

And with that, Higher Ed Watch will be taking a break from publishing until Jan. 6. Happy Holidays to all and we'll see you in 2009.

Federal Student Loans

House Republicans Still Confused About Student Loans

Naughty and Nice

NAUGHTY

NICE