Student Loans

Senator Gregg Helps Expose Student Loan Industry Falsehood

Jason Delisle — Thu, 08 Oct 2009 18:37:00 -0400

By now it's common knowledge in Washington that the proposal pending in Congress to move federal student loans to 100 percent direct lending generates savings by eliminating subsidies to private lenders under the alternative program, the Family Education Loan (FFEL) program. The student loan industry is now trying to draw attention away from those subsidies by arguing that it is actually student borrowers who will generate the savings when the government charges them interest on their direct loans. Take for example a comment that an ardent FFEL supporter posted on this blog last week.

First, under current law, the government will not pay lenders $87 billion [in subsidies] over the next ten years to make federal student loans -- in other words, that's not where the savings from eliminating FFELP comes from, and Second, the projected costs savings from eliminating FFELP represents profit, the margin, what's left over, whatever you want to call it, after the government lends money that costs it about 2 percent to families that would pay 5.6, 6.8 and 7.8 percent...

Thanks to Senator Judd Gregg (R-NH) and the Congressional Budget Office, however, we know that this argument is merely a distraction in the form of a half truth.

Earlier this year, Senator Gregg requested that the Congressional Budget Office (CBO) calculate the savings from a 100 percent switch to direct loans using "market cost" estimates. The approach (which Higher Ed Watch supports) calculates government costs using the same methods and values that the private sector would apply. As such, it better captures the risks and costs loan programs pose to the government than does the approach required by law.

Using these methods, the CBO reported in July that the loan proposal would save $47 billion over 10 years, not $87 billion as stated in its official estimate. Many FFEL supporters championed this new estimate... but it seems that they did not fully understand the implications of what CBO reported.

Market cost estimates -- like the one done by CBO -- show that direct loan borrowers collect a subsidy on their loans from the federal government, not the other way around. In other words, under 100 percent direct lending the government won't be "overcharging borrowers," nor will the loans "make money for the government." Rather, students will get loans at terms more generous than those offered in the private market, which results in a cost to the government. The results are largely due to a key adjustment that CBO made to its original estimate. In its market cost estimate, CBO assumed that the federal government can borrow only at market interest rates available to private companies -- not the below-market rates (i.e. U.S. Treasury bonds) that make direct loans appear profitable for the government. Put another way, the riskiness and potential costs of the loans are evaluated using market-based values, not risk-free government rates.

The estimate, therefore, reveals that $47 billion of the savings in the loan proposal has nothing to do with the federal government making money off direct loans or borrowing at U.S. Treasury interest rates. The $47 billion is purely and simply the private market value of the government subsidies offered to private lenders under the FFEL program over 10 years. A switch to direct loans eliminates those subsidies, producing $47 billion in savings.

To be sure, the official CBO estimate of $87 billion in savings does include the assumption that the federal government makes money on direct loans -- an assumption Higher Ed Watch does not agree with. But the point of the market cost estimate, which FFEL supporters have missed, is to correct for this assumption.

Thus, thanks to the CBO market cost estimate, we know that $47 billion of that $87 billion in projected savings is the price taxpayers pay to subsidize lenders under FFEL, and that the same $47 billion has nothing to do with the federal government's low cost of borrowing or the interest rate it charges borrowers.

Thank you, Senator Gregg, for exposing the latest half truth the student loan industry is peddling.

Disclosure: The author worked as a staff member for the U.S. Senate Budget Committee and Senator Judd Gregg.

News Flash: Student Loan Industry Denies Subsidies Exist

Jason Delisle — Thu, 01 Oct 2009 16:34:00 -0400

In the coming weeks, the Senate is expected to begin consideration of a companion bill to the Student Aid and Fiscal Responsibility Act adopted by the House of Representatives last month. In an effort to derail the legislation, which would expand the Direct Loan program and eliminate the Federal Family Education Loan program (FFEL), the student loan industry has been making some pretty outrageous arguments to Senators and staff. Consider our favorite example below from loan industry talking points -- which Higher Ed Watch has obtained -- that were provided to Senate staff.

MYTH: Forcing all students to borrow Direct Loans will save billions over the next 10 years by eliminating huge subsidies being paid to private lenders.

FACT: Lenders are not being paid subsidies. This year, lenders will pay the government $9 billion in interest that is passed on from borrowers and in fees. (Source: Budget Appendix, page 388)

It is easy to understand why anyone would be confused by such a statement. Why would private lenders care so much about the proposed elimination of FFEL if they weren't getting any government subsidies under the program? If that were the case, lenders would stand to lose nothing when the program is eliminated -- they would be able to continue to make loans to students at the same FFEL borrower terms as before. Nothing in law would prevent them from doing so.

The claim, of course, is absurd. Without a government subsidy, private lenders would not make loans with as favorable borrower terms as those under FFEL. The loans would be unprofitable.

Lenders do indeed receive government subsidies. They receive two separate subsidies that transfer virtually all of the risk and costs of making a FFEL loan to the federal government. The first subsidy is a default guarantee, which means that if a borrower does not repay his or her loan, the government reimburses the lender for 97 percent of the outstanding loan balance. It is a subsidy in the form of insurance.

The other subsidy is less straightforward, and not surprisingly, is the subject of the misleading talking point above. This subsidy, called a Special Allowance Payment, sets in law the interest rate that lenders are guaranteed to receive on a FFEL loan. The rate adjusts automatically every three months to reflect short-term market interest rates plus an arbitrary 1.79 percentage points. The federal government pays this rate on the loan no matter how high (or low) short term interest might be. That guarantee, or insurance, is a significant subsidy. The Special Allowance Payment is intentionally designed so that it bears no relation to the interest rates that borrowers pay. Thus, lenders do not earn interest from the borrower; they earn it from the federal government.

Now, where do the lenders come up with the $9 billion figure above? The government uses borrower payments to cover the costs of the interest it guarantees the lender under the Special Allowance Payment. But because the Special Allowance Payment rate fluctuates and the borrower rate is fixed, sometimes the borrower rate is more than enough to cover the rate the government guarantees the lender and other times it is not. In 2007 and 2008 the borrower rate was not enough, so the federal government paid lenders $7.7 billion and $2.5 billion respectively. This year it is estimated that borrower interest payments will more than cover the rate guaranteed lenders, leaving some $6.2 billion left over. Add in other fees lenders pay the government and the total comes to $9.5 billion.

But, the cash value of these payments in any one year is not the value of the government subsidy lenders receive. Rather, the actual subsidy is the expected value of all the future payments associated with a loan. And it is also the value of the guarantees - the insurance against default risk and interest rate risk - that lenders receive from the federal government under FFEL.

This is one of the main reasons why loans are subject to accrual accounting in the federal budget rather than cash accounting. The student loan industry knows this of course... and budget analysts know it, too, but the student loan industry is hoping Senators and their staff do not.

So, Senator, when the loan industry hands you the talking point above, tell them that if government guarantees aren't a subsidy, then FFEL lenders should have no problem with Congress eliminating these guarantees. Then, tell them that when FFEL is gone, they can continue to make loans to students at 20-year, fixed 6.8 percent interest rates just as they do today and they won't even have to make those pesky $9 billion payments to the government anymore.

A Penny Saved for College is a Penny Not Borrowed for College

Mark Huelsman — Fri, 04 Sep 2009 19:03:00 -0400

While I usually leave it over to our friends at Higher Ed Watch to discuss the latest hullabaloo in the world of student loans, something in today's Wall Street Journal stopped me on a dime. From WSJ:

New numbers from the U.S. Education Department show that federal student-loan disbursements-the total amount borrowed by students and received by schools-in the 2008-09 academic year grew about 25% over the previous year, to $75.1 billion.

Gulp. For many families, financing higher education without piling on too much debt was already a steep proposition. Like everything else post-financial crisis, it's gotten even more difficult. Job losses, home equity losses, market swings, stagnation in federal aid, state budget strains, and tuition increases have resulted in increasing uncertainty and hopelessness over household budgets, and a dramatic spike in the amount of money students are borrowing for college. Much can be blamed on the economic mire in which we find ourselves. But the point remains: many students and families are taking on unsustainable levels of debt, and it's affecting important life decisions. And in turn, it's affecting our ability to jumpstart the economy.

Before a long Labor Day weekend of despair sets in, however, this author offers hope to drink in: There are ways for Congress, the Obama Administration, States, and the financial industry to collaborate and give families a way to escape crushing levels of debt. The tonic? Targeted and meaningful savings incentives.

Perhaps ironically, the vehicle that could drive students to sustainable amounts of debt is an investment strategy that has taken as much heat as anything in the Monday-morning quarterbacking of personal finance and economic discourse: the 529 college savings plan.

529 plans have been around for decades now, though they've only existed in their current form since 2001.* And only fairly recently have some states, who are given considerable leeway to innovate with their plans, begun to realize that they can wield their power in facilitating more responsible, workable ways to finance higher ed. These have taken the form of matching contributions (like an employer with a 401k), lowering fees, partnering with scholarship programs, and more. I would argue that, not only have states only scratched the surface in giving its families a good deal on savings, but there has never been a better time for the 529 industry to submit its product as the alternative to massive borrowing. To paraphrase Dr. Franklin: a penny saved and matched is 1.5 pennies a student doesn't have to borrow.

In general, the industry (or rather, the states) needs to get serious about helping people who are currently being crushed: Low- and middle-income students. States can do this through a number of ways, and the Feds can certainly help -- with funding and/or guidance (a Treasury Department review is currently underway in assessing how these plans can be more effective and frankly, provide a safer return). First, more states should institute reforms targeted at low-income families, to counterbalance the fact that they receive no real tax benefit from contributing to 529 plans. If states' budgets are too dried up to do so, the Federal government seemingly has the authority to fund some state initiatives. This can take any number of forms, which I won't exhaust you with, but some of which you can find at the dazzling collegesavingsinitiative.org.

The original point of college savings plans was to help out a struggling middle class -- not rich enough to be carefree about paying for college, not poor enough to receive substantial federal Pell Grant awards to cover higher education costs. But as college has become more expensive and, at the same time, nearly necessary to climb the economic ladder, low-income families have received comparatively less federal aid than decades ago.

One could argue that the easy solution is to simply provide more federal aid. Maybe. But incentives to save, even when it's not enough to fund a college education, can impact more than just the personal bottom line. Even a small amount of money, stocked away explicitly for college, provides goals for students beyond high school. And just as unsustainable amounts of student loan debt can delay important life decisions after college -- like starting up a small business, completing graduate school, or even, as the WSJ notes, a marriage -- savings can reorient students towards a higher level of education than they otherwise would have completed.

There are caveats. Savings for most families, while important, is rarely going to serve as the only strategy to send the kids to school. That's okay. Scholarships, work-study, and yes, some borrowing, can get a student across the finish line with minimal damage on his or her future finances. And families are always going to be required to take it upon themselves to understand their investment choices and plan accordingly; no one is immune from the whims of the market.

That said, there are very few strategies that could chip away at the mountain of student loan debt families are currently placing upon themselves. Savings incentives seem like a great place to start.

*While states began creating college savings plans in the late 1980s, usage of 529s hadn't taken off until they were added to the Internal Revenue Code in 1996 and then given tax-advantaged status in 2001. 49 states, the District of Columbia, and an independent private consortium sponsor plans.

Who’s Right on Student Loan Cost Estimate?

Jason Delisle — Thu, 30 Jul 2009 16:15:00 -0400

Congressional Democrats missed a golden opportunity this week.

On Monday the Congressional Budget Office (CBO) published a letter to Senate Budget Committee ranking member Judd Gregg (R-NH) regarding the estimated savings of eliminating the Federal Family Education Loan (FFEL) program and making all loans through the Direct Loan program. The letter states that savings from shifting all FFEL schools to direct lending -- the centerpiece of legislation adopted by the House Education and Labor Committee last week -- would be $47 billion over ten years when using market-based estimates, compared to $87 billion when using rules dictated by the Federal Credit Reform Act.

Republican lawmakers immediately went on the attack, accusing Democrats of misrepresenting the savings the legislation would produce. In separate press releases, Senator Gregg and Rep. Jon Kline, the senior Republican on the House Education and Labor Committee, trumpeted the new CBO estimate, saying it presented a more accurate picture of how much money would be saved if the legislation was enacted.

In other words, by embracing the CBO study, senior Republican lawmakers appear to have conceded that Direct Loans are much cheaper than FFEL loans, and that continuing the FFEL program, rather than transitioning to 100 percent direct lending, would cost taxpayers an extra $47 billion over ten years.

Unfortunately, instead of saluting the Republicans for their new understanding that FFEL is the more costly program, Rep. George Miller, the chairman of the House Education and Labor Committee, went on the counterattack -- accusing Republicans (and by default, CBO) of "trying to cook the books," in requesting the market-based cost estimate.

At Higher Ed Watch, we believe that this was entirely the wrong tack to take. As we've argued previously, market costs are superior to the current Credit Reform rules. Such estimates show the price private entities would charge taxpayers to offer the same benefits and services currently funded by the government. In the case of government-subsidized student loans, the market cost reflects the price private entities would charge taxpayers to fund low interest rates for borrowers, the government's administrative costs, and the subsidies it pays to private lenders, among other things.

The method thus represents a fairer and more transparent estimate of the costs that the programs impose on taxpayers. Credit Reform rules, on the other hand, are not designed to reflect private market values for loans and have been shown to significantly understate the costs of both Direct Loans and FFEL. What is more, because the student loan reform bill sponsored by Representative Miller includes new spending that is greater than $47 billion over ten years, critics can accurately claim that the bill does not include any deficit reduction when using a market-cost estimate.

Unfortunately, we do not know many specifics about the CBO market cost estimate. The letter states that a market-based discount rate was used in the estimate, but the discount rate is only one important factor in a market cost estimate; cash flows for guaranteed loans must also be treated differently than they are under Credit Reform rules for a proper estimate. It is unclear from the letter if such adjustments were made.

In short, Republicans are right to back a market-based estimate of the savings achieved from eliminating the FFEL program. They must realize, however, that such estimates still show that 100 percent direct lending is the lower cost policy and should be adopted. This is the point that Miller and his Democratic colleagues should have made, instead of picking a fight over the merits of the CBO market-based estimate. This was a missed opportunity indeed.

Disclosure: The author is a former member of the Republican staff of the U.S. Senate Budget Committee.

Proposed Pell Grant Formula Explained

Jason Delisle — Thu, 23 Jul 2009 18:25:00 -0400

On Tuesday, the House Education and Labor Committee approved a bill that makes major changes to federal higher education assistance programs. The full House may vote on it as early as next week. At the core of the bill is one of President Obama’s priority education issues: shifting all federal student loans to the Direct Loan program, generating significant administrative savings that are redirected to expand student aid. The House, however, breaks with the President’s proposal on how the savings will be spent, particularly with respect to Pell Grants.

The Pell Grant program is the cornerstone of federal grant aid for low-income college students. In academic year 2008-09, eligible students received Pell Grants worth between $890 and $4,731 each to pay tuition and attendance costs.

In his budget request earlier this year, the President proposed shifting all student loan savings to the Pell Grant program, indexing grant levels to inflation, and making the program’s funding stream mandatory, rather than discretionary, like entitlement programs such as Social Security. This “mandatory funding” would remove Pell Grants from the annual appropriations process, solving a number of budgeting problems. The House proposal, however, does not quite accomplish these goals.

While the House bill does create a new mandatory funding stream, it would fund only a portion of the annual Pell Grant, rather than all of it, as the President proposed. Thus, the House bill still leaves most Pell Grant funding in annual appropriations. The new funding formula would provide $76 billion from 2011-2019, which includes $27 billion in mandatory Pell Grant funding already available through a 2007 law.

Here is how it would work. Starting in 2011, mandatory funds will become permanently available for Pell Grants. Annual funding growth would be tied to a maximum total grant of $5,550 in 2010 (a maximum discretionary grant of $4,860 plus the mandatory boost of $690), increased according to inflation plus 1 percentage point. An inflation rate of 1.4 percent, would make the 2011 level $5,683. The new mandatory funding formula, however, will provide only about $823 of that amount ($5,683 minus $4,860). The rest is contingent on fiscal year 2011 appropriations. In fact, in order for the inflation adjusted increase to take effect, appropriations legislation must fund a maximum grant of at least $4,860 each year.

Put another way, the mandatory funding portion is calculated each year by increasing the prior year grant by inflation, then subtracting $4,860. The difference is funded automatically through mandatory funding. In 2011, for example, the $823 portion of the grant dictated by the formula will be supported by an automatic $5 billion in mandatory funds, while the balance of $4,860 in discretionary funding is contingent on an appropriation of at least $18 billion.

What happens if an appropriation bill funds more than a $4,860 maximum grant? Under such a scenario, the total maximum grant level would be higher, and the inflation adjusted level in each future year would also increase, causing mandatory funding to rise as well. In short, an increase in the appropriated maximum discretionary grant leads to a further increase in mandatory funding in each future year.

On the other hand, if appropriation legislation cuts the discretionary grant level from $4,860, the portion of the grant supported by mandatory funding will not decrease. The total maximum Pell Grant that year, however, would be lower than the prior year due to the reduced appropriation. If the discretionary appropriation funded only a $3,000 grant in 2012, for example, then the calculation to determine the mandatory portion simply uses preceding year levels ($5,683 minus $4,860) to arrive at $823. Therefore, under this scenario, the total maximum 2012 grant would be $3,823.

To wrap up, the House student aid reform bill does indeed increase mandatory funding for Pell Grants, but it still leaves uncertain the maximum grant for which students will be eligible each year. While part of the program is now indexed to inflation, it by no means ensures students a rising Pell Grant each year. Ed Money Watch will continue following the legislation as it makes its way through Congress.

New Report on Federal Student Loan Guaranty Agencies

Ed Policy — Tue, 14 Jul 2009 14:29:00 -0400

In February, President Obama proposed eliminating the Federal Family Education Loan (FFEL) Program and shifting all new federal student loans to the Direct Loan Program. Both programs provide the same loans to student borrowers (i.e. Stafford loans), although they are administered in different ways. While media coverage has focused on the lenders that operate the FFEL Program, federal student loan guaranty agencies have been largely ignored. Guaranty agencies are private non-profit or state government entities that administer federal insurance and collect on defaulted student loans. Yet any significant changes to the FFEL Program will affect these little-understood entities.

To help inform the debate on federal student loan reform, the New America Foundation's Education Policy Program today released "Rethinking the Middleman," a policy paper that provides an overview of the history and current responsibilities of guaranty agencies, a critical analysis of the federal payments these entities receive, and recommendations for reforms.

The paper includes the following:

The history of guaranty agencies and how their roles have changed and evolved over time;
How federal payments to guaranty agencies work at cross purposes and can undermine policy goals;
The negative consequences of affiliations between guaranty agencies and student loan companies for borrowers and FFEL Program integrity; and
Options for policymakers to reform these agencies.

The full report is available here.

Explaining the ECASLA Programs, an Update

Jason Delisle — Tue, 26 May 2009 16:05:00 -0400

In January, the Federal Education Budget Project published an issue brief on the student loan purchase programs put in place under the Ensuring Continued Access to Student Loans Act of 2008 (ECASLA). Given the new developments and new information released by the Obama Administration, it's a good time to catch up on the ECASLA programs.

When financial markets began to break down last year, Congress confronted the possibility that private lenders issuing federally-backed student loans (the Federal Family Education Loan Program, FFEL) might not be able to meet student demand. In response, Congress passed legislation (ECASLA) granting the U.S. Department of Education temporary authority to purchase FFEL loans. The new loan purchase authority helps ensure that FFEL lenders have access to adequate and affordable capital and can convert their loan assets into cash to fund new loans. ECASLA gives the Department of Education considerable discretion in designing and implementing loan purchase programs. Using this discretion, the Department designed and implemented four separate loan purchase arrangements: a put option; a short-term purchase program; a financing arrangement; and an asset-backed commercial paper support program. Each option involves different purchase arrangements and targets loans from different years. The ECASLA issue brief, which will be updated in the coming weeks, includes an explanation of each program. [A version of the issue brief updated June 1, 2009, is available here.]

Since January, new information has been made available about the ECASLA programs. In March, the Obama Administration reported the volume of loans each private lender made under each program. The reports show that eleven lenders exercised put options on FFEL loans issued during the 2008-09 academic year, selling $701 million in loans back to the Department of Education. Two lenders, Edamerica and Wachovia Education Finance, accounted for about 90 percent of that volume. Subsequently, the Office of Management and Budget (OMB) released estimates in May 2009 showing that $4.8 billion in 2008-09 loans ultimately will be put to the Department (about 8 percent of expected 2008-09 FFEL issuance).

The Obama Administration also released information in March regarding the short-term purchase program that the Department operated from December 2008 through February 2009. The program applied to 2007-08 academic year leans. In total, six lenders sold $998 million in loans under the program. One lender, the SLM Education Finance Corp (Sallie Mae), accounted for $952 million of that amount.

As of March 18, 2009, the Department had provided $23.2 billion in financing to 23 lenders through the ECASLA participation interest program. The program effectively allows private lenders to borrow from the Department of Education to make FFEL loans to students. SLM Education Finance Corp (Sallie Mae) had used the program to fund $13.8 billion in 2008-09 academic year loans, the most of any one lender. The Student Loan Corporation (Citibank) made $2.1 billion in loans, the second most of any lender using the program. More recent information released by OMB in May 2009 shows that an estimated $33.8 billion in 2008-09 loans will be made through the participation interest program, representing 55 percent of FFEL program loans to be issued that year.

Finally, the ECASLA asset-backed commercial paper conduit program first announced by the Department last November is now up and running. The program was expected to begin in February 2009, but was delayed until May. Under the program, the Department of Education is acting as buyer-of-last-resort for FFEL loans financed through private conduits. The Department has committed to purchase the underlying FFEL loans in the event that a conduit cannot refinance maturing commercial paper. (For more on what an asset backed commercial paper conduit is, read the ECASLA issue brief.)

Under the arrangement, the Department will purchase FFEL loans issued after May 1, 2008, for 100 percent of outstanding principal and accrued interest. Loans issued earlier will be paid out at 97 percent of unpaid principal and accrued interest. The conduit must pay the Department two separate fees, one based on the value of the outstanding commercial paper it has issued to finance FFEL loans, and another based on market interest rates. The conduit will be backed by the put option until January 20, 2014, but no loans may be placed into it after June 30, 2010.

To date, one conduit has been approved by the Department of Education: Straight-A Funding, LLC, which was set up by Citibank and Morgan Stanley and is run by Bank of New York Mellon. In addition to the put option provisions provided by the Department of Education, the federal government will also provide a five-year, $60 billion line of credit to the conduit through the Federal Financing Bank (FFB). The FFB is an existing government corporation within the U.S. Treasury Department that centralizes federal and federally-assisted borrowing. The line of credit will be used to provide short-term (90 day) loans to the conduit if it experiences difficulty refinancing maturing commercial paper. Thus, the Straight-A Funding conduit has two federal supports to ensure liquidity: the FFB line of credit and the Department of Education put option on the underlying FFEL loans. As of May 26, 2009, several large private lenders had announced placement of FFEL loans into the conduit or approval from the Department to begin placing loans into it.

Be sure to read the updated ECASLA issue brief when it is released in the coming weeks. [A version of the issue brief updated June 1, 2009, is available here.]

Advice for Obama: Stop the Revolving Door

Ben Miller — Wed, 12 Nov 2008 18:15:00 -0500

It hasn't taken long for media and bloggers everywhere to shift their attention to potential candidates for the next education secretary. But rather than indulging in games of name-dropping, we have one piece of advice for the transition team in choosing a secretary as well as candidates for other high-level positions: End the revolving door between the Department of Education and student loan companies.

For the past eight years, the Bush administration has employed the revolving door as a common method of filling its most important higher education posts in the Department of Education. According to the Wall Street Journal, at least eight top Department officials came from the student loan industry, including a deputy education secretary, an assistant secretary of postsecondary education, and a chief operating officer of the Federal Student Aid office (FSA).

With so many foxes watching the hen house, is it any surprise that the Department consistently looked the other way as widespread abuses occurred in the Federal Family Education Loan (FFEL) program? While some simply turned a blind eye, there is compelling evidence to suggest that others used their powerful positions to benefit their former employers far more than taxpayers and students

Take Matteo Fontana, the former Sallie Mae official who was in charge of overseeing the lenders and guarantors that participate in the FFEL program. Under his watch, Fontana overturned an Inspector General decision that had prevented the nation's largest student loan company, and his former employer, to ostensibly take control of the nations' biggest guarantor, USA Funds. Allowing the contract to go through helped Sallie Mae become a fully privatized corporation while negating any claim that the guarantor was properly exercising its oversight role. Allowing Sallie Mae to basically run USA Funds also created twisted incentives that allowed the lender to reap huge profits by growing its borrowers' debt to unmanageable levels.

The Department also put Fontana in charge of the National Student Loan Data System (NSLDS), a central repository of all borrowers in either federal student loan program. The result? Fontana and other Education Department officials looked the other way as loan companies mined the database, harvesting students' personal information for marketing purposes.

Nearly every major loan scandal in the past eight years has had a revolving door official at the center of the Department's involvement. Bush administration officials with lender ties looked the other way as loan companies engaged in "pay for play" scandals, providing illegal inducements to financial aid officers in exchange for a spot on preferred lender lists. The officials did the same thing during the 9.5 scandal, in which lenders bilked taxpayers out of an estimated $600 million by repackaging decade-old loans to collect a high guaranteed subsidy rate. And those are just the scandals we know about.

Bush administration officials and senior Republican leaders have defended the hiring practices, saying they have to hire industry officials because they understand the loan programs better than anyone else. But if this is the case, wouldn't it make more sense to reform and simplify the programs so that the Department isn't beholden to former loan industry staff for key oversight and policy decisions?

After nearly a decade of letting lenders oversee themselves, the Obama administration needs to select Education Department officials who will put the bite back into its oversight role. This means not just picking individuals free from controversy, but experienced and knowledgeable people that will be able to critically examine the federal student loan programs for instances of illicit behavior. One way to begin this process is making sure the revolving door is sealed once and for all.

(Image used under a Creative Commons license from Flickr user kblackout)

Election 2008: Student Aid Hurdles for the Next President

Ed Policy — Tue, 04 Nov 2008 16:00:00 -0500

No matter whether Sen. Barack Obama (D-IL) or Sen. John McCain (R-AZ) wins today's election, the next president is going to face major challenges on the higher education front.

While neither candidate has made education a centerpiece of his campaign, each has offered proposals that may be difficult to carry out given the hurdles that lie ahead. Not the least of which is the federal budget deficit, which is likely to far exceed the $482 billion the Congressional Budget Office projected in July. Obama may be particularly frustrated in his plans, as he has called for significantly increased spending on federal student aid. McCain, on the other hand, has proposed consolidating the government's aid programs.

Here is a brief description of some of the other student aid challenges awaiting the next president:

The Continuing Credit Crunch

Over the last year, the federal government has made extraordinary efforts to help the student loan industry cope with the turmoil in the financial markets. As a result of these efforts, and the revitalization of the Direct Student Loan program, students haven't experienced any difficulty obtaining federal loans.

Still, there's little evidence that the credit crunch is likely to subside anytime soon. With more and more colleges considering switching to Direct Lending, lenders and their allies at groups like the National Association of Student Financial Aid Administrators will continue to raise panic levels and demand greater federal intervention to prop up the ailing Federal Family Education Loan (FFEL) program further (including a renewed effort to get Congress to rescind the cuts it made to lender subsidies last year). In the face of these entreaties, it will be important for the new president to remember that the point of the federal student loan programs is not to protect the well-being of each and every lender, but to make sure that low-cost loans are available to college students.

The new administration will also have to resist efforts by the loan industry to use the credit crunch to kill key student loan reforms, such as the new pilot PLUS auction program that is scheduled to go into effect next fall. If anything, the credit squeeze provides even further evidence that policymakers need to fundamentally change the way that the government compensates student loan providers.

Budget Shortfall in the Pell Grant Program

A surge in demand for Pell Grants -- caused by the downturn in the economy and a major expansion in student eligibility for the awards by Congress -- has left the program in a deep hole. According to the Department of Education's budget chief, Congress will need to find an additional $4 to $5 billion to keep the maximum Pell Grant award at its current level of $4,731. Given the political stakes, the next president and Congress will likely find the money to keep the program whole. But spending such an exorbitant amount just to maintain the status quo will leave them with few, if any, additional resources to raise the Pell Grant further or to finance other student-aid priorities.

This could be especially problematic for Obama because he would be under substantial pressure from Democratic-leaning interest groups to substantially increase spending on student aid. Ironically, if elected, he could find himself in the same position as former Democratic President Bill Clinton was early in his presidency. During his first several years in office, Clinton and the Democratic Congress grappled with a $2 billion Pell Grant shortfall and were able to provide only a tiny increase in the maximum grant. College leaders and lobbyists complained bitterly. This is "what we are used to seeing from Reagan and Bush. But a kick in the teeth hurts a lot more from a friend," Julianne Still Thrift, then-president of Salem College and a strong supporter of Clinton, told The Chronicle of Higher Education in 1993.

Expiring Student Aid Programs and Benefits

The next president is also going to have a very difficult decision to make regarding student loans toward the end of his first term. The interest rate reduction that Congress approved for subsidized federal student loans is due to expire at the end of the 2011-12 academic year. In other words, under current law, loans issued that year will have a fixed interest rate of 3.4 percent for the life of the loan, but loans issued the following year will carry a fixed rate of 6.8 percent. The new president will have to decide whether he supports extending the 3.4 percent interest rate. Doing so could cost as much as $3 billion a year. Of course, allowing student loan interest rates to double could be politically risky, no matter the costs or public policy implications. [At Higher Ed Watch, we believe that policymakers should consider expanding the existing student loan interest rate reduction instead. That proposal would be less costly and better targeted on recent college graduates with burdensome levels of debt.]

Also expiring during the next president's term will be two relatively new grant programs that provide additional support to Pell Grant eligible students who meet certain academic standards. Both programs were created in 2006 by the Republican-led Congress and funded through 2010. The first, Academic Competitiveness Grants (ACG), are given to low-income freshmen and sophomores who complete a "recognized rigorous secondary school program of study" and maintain a 3.0 grade point average in college. The other, SMART Grants, are available to low-income juniors and seniors majoring in mathematics and science. The new president will have to decide whether to extend these programs, at a cost of $1 billion a year.

For a number of reasons, these programs have not been particularly well received by financial aid administrators and college lobbyists, and they have been underutilized by students. In fact, Congress has had to rescind a significant amount of the money it has provided for these programs, citing low participation rates. Still, these programs do provide generous benefits to financially-needy students. So deciding whether or not to continue financing them will not be an easy call to make.

Despite these hurdles, we remain hopeful that the next president will take higher education policy making in a new direction. Tomorrow, we will highlight some of the changes we would like to see the next administration make. Stay tuned.

Guest Post: Better Data on Student Borrowing Needed

Ed Policy — Wed, 22 Oct 2008 17:33:00 -0400

[Editor's Note: The Project on Student Debt is releasing today its third annual report on the debt of recent college graduates. The report and accompanying website provide average student debt level data for every state and for most four year colleges in the country. In this guest post, Matthew Reed, the report's main author, discusses the limits of this data and suggests steps policymakers can take to make more accurate and timely information available.]

By Matthew Reed

Student debt is up again, according to the data that we at the Project on Student Debt released today. One of the lessons we have learned from putting together these reports for the past three years is just how difficult it is to get timely and accurate information about students' loans. Congress and the next leadership of the U.S. Department of Education could take some simple steps to improve that situation.

For our purposes, the most useful data comes from annual surveys of colleges by college guide publishers such as Peterson's. The utility of this data, however, is limited because so much of the information is missing or unreliable. Colleges self-report and many fail to respond to the survey on an annual basis, resulting in missing or repeated data.

In addition, colleges use different methodologies to calculate these figures, depending on the capabilities of their data systems and the expertise and interest of the staff members responsible for filling the surveys out. While student debt figures for some schools stay the same for years as no one bothers to update them, at other schools, they fluctuate wildly from year to year as staff turn over or new software is used make the latest calculations.

The Department of Education maintains a database tracking students loans -- the National Student Loan Data System (NSLDS). Unfortunately, the Department doesn't make sufficient use of it. At the Project on Student Debt, we believe that expanding the information entered into this system and the reports generated from this system would go a long way toward providing more useful information for policymakers, student borrowers, and the public.

Judging by the legislation authorizing NSLDS, Congress clearly expected the Department to use the database to not only provide lenders and institutions with the information necessary to operate the loan programs, but to provide borrowers with information about their own loans and policymakers with information about student borrowing generally.

The Higher Education Act directs the Department to use the database in part for research and policy analysis regarding student debt levels. This includes analyzing factors such as family income and the type of institution attended. It also identifies providing information to student borrowers about the current status of their loans as another important purpose of the system.

As of now, Department officials have made very limited use of the database for these purposes. The agency currently uses NSLDS to calculate cohort default rates for colleges, and to report on the aggregate student loan volume, broken down by program (Direct Lending versus the Federal Family Education Loan Program for example), type (federally subsidized or unsubsidized Stafford Loans, for example), state, and sector of higher education (two year versus four year schools, for instance). While this is useful information about the overall size and growth of these programs, it does not give us any indication of the debt burden faced by students at particular institutions.

The Department needs to make much more detailed data on student borrowing available. Using NSLDS, the Department should publish the following information each year:

Loan volume by loan program and loan type for each institution (unsubsidized/subsidized Stafford loans, PLUS loans, etc.)
Average cumulative debt levels for students graduating from college each year at the state, national, and institutional levels
Average cumulative debt levels for students leaving college without completing a degree or certificate program
Data on borrowing patterns by income level and level of demonstrated financial need
Data on borrowing patterns by students who receive federal Pell Grants

These statistics would provide valuable and timely information to policymakers regarding trends in student borrowing and indebtedness. Moreover, we believe that publishing this data would provide some accountability for institutions regarding the way in which they package student loans.

But to truly get an accurate picture of student borrowing trends, one additional step is needed - because private student loans, which up until recently have been the fastest growing form of student loans, are not currently included in NSLDS.

We are urging Congress to require lenders to report all the private loans they make to NSLDS. Such a requirement would be beneficial to both students and policymakers. As of now, we don't know the full extent of private loan borrowing that is occurring. In many cases, these high-cost loans are marketed directly to students and neither the institutions nor any government agency is aware that they have been made. As a result, students often take out these loans without realizing that lower-cost federal loans are available.

Requiring the inclusion of private loans in NSLDS would fit in perfectly with one of the main purposes of the database: to give borrowers a place to go to see all of their student loans. It is important for borrowers to have access to information on the current holders and servicers of their loans, as well as the current balance and payments due. They should be able to see this information for all of their loans, not just federal ones. Students are often unclear on the distinctions between the different programs under which they borrow, especially when the loans may come from the same lender. Only later during repayment do many students realize the importance of knowing which lender holds their loans and what program it was made under.

As student debt levels continue to increase, it is crucial that policymakers and the public have accurate, timely information about patterns of student borrowing. The Department of Education should use the data already available in NSLDS to provide this information. In addition, lenders should be required to report private student loans to NSLDS. Taken together, these steps will ensure that students and policymakers have the information they need to make good decisions regarding student loans.

Matthew Reed is a policy analyst with at the Institute for College Access and Success, the sponsor of the Project on Student Debt. Higher Ed Watch is supported in part by the institute with funds provided by the Pew Charitable Trusts. His views are his own and do not necessarily reflect those of the New America Foundation.