Student Loans

Higher Ed Roundup: Week of September 29 - October 3

Ed Policy — Fri, 03 Oct 2008 17:00:00 -0400

Direct Loan Volume Soars in Response to Credit Crunch

Spellings Presents Plan to Shrink the FAFSA

Ed Dept. Underestimates Improper Payments to Lenders, IG Reports

New IRS Form Questions Colleges on Spending, Endowments

Direct Loan Volume Soars in Response to Credit Crunch

The Direct Loan program's volume has increased by nearly 50 percent this year, according to the U.S. Department of Education. In the wake of the credit crunch, roughly 400 schools have switched to Direct Lending from the competing Federal Family Education Loan program, bringing the total number of schools offering Direct Loans to 1,369. Overall, students at these schools have taken out $16.4 billion in loans this year, which is about 35 percent of the total federal student loan program volume. At its most popular in the mid-1990's, Direct Lending controlled nearly 40 percent of the total loan volume.

The Department also revealed his week that 10 FFEL lenders have taken advantage of the agency's loan purchase program first authorized in the Ensuring Continued Access to Student Loans Act (ECASLA). Lenders sold about 40 percent of this year's $30.6 billion FFEL volume this year back to the Department, and are working on selling most of the remainder, according to The Chronicle of Higher Education. In a letter to shareholders, Sallie Mae reported that it intends to use the program to finance all of its expected $20 billion in loans this year. The buyback program is designed to help loan companies secure financing by giving them the option of selling all or portions of new student loans back to the Department. By contrast, no schools has had to turn to FFEL's original backup plan, the overly complex and confusing "lender-of-last-resort system," which requires guaranty agencies to provide loans to students that have been turned down by conventional lenders .

Spellings Presents Plan to Shrink the FAFSA

U.S. Education Secretary Margaret Spellings unveiled a proposal on Wednesday to significantly simplify the process of applying for federal financial aid. Under the plan, which Spellings announced in a speech at Harvard University, the Department of Education would slash the number of questions asked on the Free Application for Federal Student Aid (FAFSA) from 120 questions to 27. In addition, the proposal calls for the agency to use year-old tax data so that the agency would be able to inform students about their aid eligibility at the beginning of their senior year in high school rather than at the end. These changes, Spellings said, should encourage low-income students to pursue a higher education rather than discourage them, as the current aid application process does. "We should be knocking down barriers, not putting up hurdles," she stated. "It starts with a new form." In an interview with Inside Higher Ed, Spellings said she said she hoped that Congress would give "careful consideration" to her plan.

Ed Dept. Underestimates Improper Payments to Lenders, IG Reports

The U.S. Education Department has dramatically understated the amount of improper payments it has made to lenders participating in the Federal Family Education Loan program, according to a recent report by the agency’s Inspector General (IG). Federal law requires government agencies to annually report on incorrect payments they have made to outside entities. According to the IG, the Federal Student Aid office’s Financial Partners Services’ division keeps changing the methodology it uses to estimate improper payment rates, and as a result, the estimates have varied wildly. For example, the Department claims that it made $258-million in improper payments to lenders and guaranty agencies in the 2006 fiscal year, but only $2 million in fiscal year 2007. The report goes into great detail about flaws in the Department’s methodology, but lays some of the blame on the overwhelming complexity of the FFEL program.

New IRS Form Questions Colleges on Spending, Endowments

Colleges will soon have to provide the Internal Revenue Service (IRS) with greater detail about their finances, including how they use their endowments and compensate top executives, on a new reporting form that the IRS said it will release shortly. The announcement came almost a month after Sen. Charles Grassley (R-IA) and Rep. Peter Welch (D-VT) convened a roundtable on endowment spending at which they asked the IRS to create a special 990 tax form for colleges. The lawmakers especially wanted the new form to include more questions on expenses, revenues, and use of endowment income. In addition to covering these topics, the new IRS questionnaire will asks schools about related business opportunities and lavish perks offered to employees -- at least in part to determine whether colleges are taking advantage of their non-profit status.

New America Foundation Releases Report Exposing Spin on Student Loan Costs

Jason Delisle — Wed, 01 Oct 2008 16:58:00 -0400

Is there another round of fighting brewing between the government's two competing student loan programs? Consider recent events:

In the wake of the credit crunch, more colleges are opting to join the Direct Loan program, driving up its volume as a share of student loans for the first time in well over a decade.
Recent government efforts to shore up the Federal Family Education Loan (FFEL) program have moved us closer to letting lenders make loans with federal capital (looks a lot like the Direct Lending model to us).
Democratic presidential candidate Barack Obama has proposed the wholesale elimination of the FFEL program in favor of moving to 100 percent Direct Lending.

The stars appear to be aligning for a renewed debate about which loan program is better for students and cheaper for taxpayers.

Should hostilities be renewed, expect the student loan industry to switch into high gear to try to discredit Office of Management and Budget (OMB) and Congressional Budget Office (CBO) estimates that show that Direct Lending is cheaper for the government to run. In evaluating the loan industry's claims, lawmakers, journalists, and the public should be especially wary of one line of argument that surely will be made. In recent years, the loan industry has put out a number of reports arguing that the private market would assess the costs and risks of the loan programs differently than OMB and CBO (which must abide by government accounting rules) and that this discrepancy explains away any cost advantage Direct Lending is shown to have.

Today, the New America Foundation is releasing an in-depth report examining the lending industry's claims about determining "market costs" for student loans. We have found that trade associations and consulting organizations working on behalf of the student loan industry have twisted a legitimate budgeting concept into a half-truth. In trying to use the market cost concept to discredit government estimates that show subsidizing lenders to make student loans is more expensive than having the government make loans directly, they have made serious errors in their reasoning and methodology, and many of their conclusions are just plain wrong. Making matters worse, the GAO has made similar errors in its own work on the topic.

To bring more clarity to this debate, our report includes the following:

A discussion and explanation of the market cost concept for federal student loan programs.
A detailed analysis and critique of the market cost reports published by government agencies, private consulting companies, and trade associations representing student loan companies.
An identification and explanation of the major errors and misleading information in the work published on the market cost concept for federal student loans.
A discussion of student loan cost estimates by Northwestern University's Deborah Lucas and the Congressional Budget Office's Damien Moore that corrects many of the errors made in other market cost work.

We hope this report will correct the record and serve as an important reference for those interested in the student loan cost debate.

Risky Plan to Bail Out Non-Profit Lenders Gets Hearing

Jason Delisle — Wed, 17 Sep 2008 22:35:00 -0400

On Thursday, the U.S. House of Representatives Financial Services Committee is set to hold a hearing on auction rate securities -- a broken investment mechanism that non-profit student loan companies have relied on heavily for financing. The hearing is largely the brainchild of Rep. Paul Kanjorski (D-PA), a member of the committee who is using it to gin up support for federal policies to help non-profit lenders. This was evident from Kanjorski's initial press release on the hearing, in which he faulted the Bush Administration for failing to use "its full authority to help non-profit lenders like PHEAA," the primary student loan provider in the Congressman's home state.

Clearly Kanjorski thinks that the way the U.S. Department of Education enacted the Ensuring Continued Access to Student Loans Act (ECASLA), the law Congress passed last spring to help student loan providers weather the credit crunch, did not do enough to help non-profit lenders. We at Higher Ed Watch disagree. Instead, we believe Kanjorski has framed the non-profit lender problem in a dubious manner, and is proposing to solve this "problem," with a series of flawed solutions.

It seems that we have to keep reminding policymakers (and sadly, the media, too) that the one, and only, goal of the federal student loan program is to provide loans to college students that are more generous than those offered in the private market. That's it. So, yes, there would be a problem if students weren't able to get federal loans, which even top industry lobbyist John Dean agrees should be the "litmus test" of whether or not there is a "crisis."

But Kanjorski and many in the media have framed the problem in terms of lenders, not students. Certainly, some nonprofit lenders, including PHEAA, have suspended their lending operations this year because they've had trouble financing loans. This has forced students and colleges to find alternative lenders, but there has not been a breakdown in federal loan availability. Students have been able to borrow all the loans to which they are entitled.

Why the hearing then? It appears that Kanjorski believes that the student loan program is supposed to serve two sets of beneficiaries: students and lenders. By this logic, if non-profit lenders can't make loans, then the program isn't working -- even if students are able to obtain federal loans from other lenders.

Ultimately, we believe Kanjorski is acting for political reasons, not for fear that students are in danger of losing access to aid. After all, this wouldn't be the first time, as Higher Ed Watch has previously reported, that Kanjorski has done the bidding of the student loan industry.

Political Clout and the Non-Profit Lender

Kanjorski, like other Members of Congress, wants to help non-profit lenders, not for pressing policy reasons, but because of the political hold they have over Congress' home state constituencies. Many non-profits are intertwined with state governments and serve as big employers. By keeping non-profits in business -- protecting the federal subsidies these nonprofits receive through the federal loan program -- elected officials can take credit back home. But not all non-profits are using taxpayers' dollars wisely. A recent report by the Pennsylvania state auditor found that the Pennsylvania Higher Education Assistance Authority "created an elite compensation package for its executive staff that included excessive salaries and incentive payments not typical of a prudent state agency." This included salaries of close to $300,000 for both the president and CEO and over $200,000 for several executive vice presidents.

It is also important to note that non-profits gain political favor by hiring former Members of Congress. These individuals are hardly experts on the student loan industry, but have valuable Washington connections. In addition, non-profit lenders and their trade associations maintain a revolving door with the U.S. Department of Education, as well as key Congressional committees and offices. To be clear, we don't take issue with lobbying per se, or with organizations building effective lobbying staff. But lawmakers who are persuaded by such lobbying to enact policies that are not in the best interests of students and taxpayers should be called on the carpet.

An Unnecessary Solution

To demonstrate how influence trumps good policy let's consider one policy that Kanjorski promotes on behalf of non-profit lenders.

As part of ECASLA, Congress allowed private lenders to sell their loans to the Department of Education. The policy ensures that the federal student loan market remains liquid. Lenders are more apt to make federal loans if they know that there is a willing buyer who can give them cash for the loan if they need it. The Department chose to implement the loan purchase authority for new student loans (those issued for the 2008-2009 academic year) even though ECASLA gave it the authority to buy loans issued as early as 2003. Kanjorski has chastised the Department for not buying earlier issued loans, an action he claims would help non-profit lenders. In reality, the Department acted responsibly by protecting the interests of taxpayers; Kanjorski's proposal, on the other hand, would benefit lenders at taxpayers' expense.

If lenders were allowed to sell loans that they made prior to 2008, then they could cherry pick their least profitable and most risky loans and unload them on the Department, keeping only the best loans on their books. (Lenders have been doing something similar with federal consolidation loans for years, forcing delinquent borrowers into the direct loan program rather than making the loans themselves).

The White House Office of Management and Budget and the Department of Treasury recognized the potential for cherry picking scenario in their risk assessment of the loan purchase program. Loans issued prior to 2008 would likely have enough performance history for a lender to assess default risk and flip riskier loans to the Department. But lenders are less able to make such determinations for new loans that lack a performance history. As a result, the Department of Education limited its loan purchase agreement to 2008-2009 loans only.

In condemning the prudent course the Department has taken, Kanjorski puts the interests of non-profit student lenders before the interests of taxpayers. Meanwhile, students aren't having any problem getting federal student loans. Of course, the hearing isn't really about them anyway.

Where They Stand: John McCain on Higher Ed

Ed Policy — Wed, 03 Sep 2008 19:58:00 -0400

Fifteen months after launching his presidential bid, Sen. John McCain (R-AZ) started laying out his higher education policy agenda last month. In a news release, the Senator outlined his policy priorities but provided few details about his proposals.

With the Republican National Convention in full gear this week, Higher Ed Watch decided to take a closer look at McCain's higher education policy plans. He aims to do the following:

Simplify the Federal Financial Aid System

McCain believes that many eligible students do not seek out federal financial aid because they find the aid application process too complex and don't understand their options. He would address these concerns by:

Consolidating Programs: McCain proposes combining various federal grant and loan programs as a means to simplify their administration and help students better understand their eligibility for aid. While he doesn't get into specifics, it's likely that he would follow the Bush administration's lead and take aim at the campus-based student aid programs, which primarily supplement Pell Grants for low-income students. Critics say these programs are not serving the neediest students well because a disproportionate share of the funding is going to students at the wealthiest colleges.

Streamlining the FAFSA: McCain supports efforts to shorten the Free Application for Federal Student Aid (FAFSA) to make it easier for students to fill out.

Redesigning Tuition Tax Breaks: The Senator proposes consolidating the various higher education-related tax credits and deductions, including the Clinton administration's HOPE and Lifetime Learning tax credits. "The existing tax benefits are too complicated, and many eligible families don't claim them," McCain says. "By simplifying the existing benefits, I can ensure that a greater number of families have a lower tax burden when they are helping to send their children to college."

"Fix" the Federal Student Loan Program

The Senator calls for creating a "simpler and more effective" federal student loan program but provides little explanation of how to accomplish this goal. Unlike his Democratic opponent, who has called for eliminating the Federal Family Education Loan (FFEL) program and providing loans entirely through the U.S. Department of Education, McCain believes that continued lender participation in the federal loan program is vital. He would, however, "demand the highest standards of integrity" from participating lenders, presumably to prevent a repeat of the pay-for-play student loan scandal that Higher Ed Watch helped expose last year.

Make Higher Education More Transparent for Consumers

McCain believes that the Department of Education can help students make better informed decisions about their college choices by publicly releasing "in a clear and concise manner" reams of data that colleges report to the federal government. The government already collects huge amounts of data from schools but "does nothing with the information." The Senator, however, would not impose any additional reporting requirements on colleges, saying that "the answer" to higher education's problems "is not to impose more regulations." He favors shining a light on information that is already available.

Eliminate Earmarks for Colleges

As part of his campaign against pork-barrel spending, McCain would bar lawmakers from providing Congressional earmarks to colleges for research spending. "Earmarking is destroying the integrity of federally funded research," he says. He would spend a portion of the money saved to increase government spending on university research that is competitively awarded by federal agencies like the National Science Foundation.

McCain's proposals are as notable for what they include as what they leave out. For example, his plan does not call for any new spending on federal student aid. This is in sharp contrast to President Bush, who pledged during his presidential campaigns to significantly boost spending on Pell Grants.

Sen. Barack Obama (D-IL), McCain's Democratic rival, has already criticized McCain for failing to call for expanding student aid. In his speech to the Democratric convention, Obama cited this ommission as evidence that McCain doesn't understand "what's going on in the lives of Americans."

"How else," he asked, could McCain offer "an education plan that would do nothing to help families pay for college?" McCain has not yet responded to this attack, but to be fair, many student-aid experts are skeptical about whether Obama's proposal to significantly expand spending on tuition tax credits is the most effective way to increase college access and affordability.

Stay tuned to Higher Ed Watch in the weeks ahead for more analysis of the presidential candidates' higher education proposals.

Higher Ed Roundup: Week of August 11 - August 15

Ed Policy — Fri, 15 Aug 2008 21:04:00 -0400

President Bush Quietly Signs Higher Education Act Into Law

No Need for Additional Loan Changes for Now, Congressional Research Service Says

Massachusetts Calls Off Plan To Rescue Lender

ACT Exam's Popularity Increases

President Bush Quietly Signs Higher Education Act Into Law

Without any comment or ceremony, President Bush signed into law on Thursday legislation to reauthorize the Higher Education Act for five years. The measure, which was approved by Congress with overwhelming bipartisan support late last month, has received a less-than-enthusiastic reception from the Bush administration. On the day the legislation won final approval, Education Secretary Margaret Spellings released a statement criticizing it for creating more than 60 "new, costly, and duplicative" programs. Spellings also complained that lawmakers were not tough enough on colleges. "While the legislation takes some positive steps forward, it fails to create the necessary reforms in accessibility and affordability, and it falls short on strengthening accountability," she said. "More work can -- and must -- be done to make achievement outcomes more transparent to students and families." Among other things, Spellings was reportedly peeved that the new law reduces the education secretary's power to regulate college accreditation.

No Need for Additional Loan Changes for Now, Congressional Research Service Says

The need for additional changes in federal student loan policy to deal with the credit crunch will depend on “how the current economic slowdown develops, and how financial markets react and evolve in the face of challenging economic conditions,” according to a recently released report by the Congressional Research Service. The report, “Economics of Guaranteed Student Loans,” surveyed the supply and demand functions of the student loan market and concluded that it was too early to determine whether difficulties faced by lenders and banks were endemic to the student loan market or an effect of global financial turmoil. As such, the report did not endorse any additional legislative changes, instead suggesting policymakers take a wait-and-see approach. Such a tactic also seems prudent given recent reports from states such as New Hampshire that students are still finding loans, overblown stories about the loan crunch notwithstanding.

Massachusetts Calls Off Plan To Rescue Lender

Officials in Massachusetts announced this week that they were abandoning a plan to try and bail out the state's nonprofit lender, the Massachusetts Education Finance Authority (MEFA), because they realized that there isn't a student loan crisis in the state after all. Last week, Gov. Deval Patrick (D) issued an eleventh-hour appeal to colleges and the state pensions agency to to come to the aid of MEFA , which stopped issuing federally backed loans on July 1, asking them to invest in an upcoming $425 million bond sale by the agency. The state, however, received no commitments from these parties. On Thursday, State Treasurer Timothy Cahill said that state officials had second thoughts after seeing a recent poll by the Association of Independent Colleges in Universities that found that 70 percent of schools in Massachusetts had 15 or fewer students still looking for a lender. "It seems like most of the students in the state of Massachusetts have gotten alternative funding sources," Cahill stated.

ACT Exam's Popularity Increases

Once a heavy underdog, the ACT is starting to overtake the SAT as the college admissions test of choice for many students. On Wednesday, ACT officials announced that 1.42 million high school seniors took the test this year, up 9 percent from last year, and 21 percent from 2004. Much of this increase was attributed to the growing number of states that now require all graduates to take the test as part of their state assessment regimen, including ones outside of the ACT's traditional base in the Midwest. Despite the increase in test takers, exam scores remained mostly steady.

Allowing Felons in FFEL

Stephen Burd — Thu, 19 Jun 2008 21:56:00 -0400

At Higher Ed Watch, we have written much about the U.S. Department of Education's lax oversight over the lenders and guarantee agencies that participate in the Federal Family Education Loan (FFEL) program. But until we read a recent investigative report in the St. Petersburg Times, we didn't fully grasp just how lax that oversight has been.

As that report revealed, the Education Department does not conduct criminal background checks on individuals who are seeking to become eligible FFEL lenders. The agency leaves it to student-loan guarantee agencies to verify eligibility for participation. But apparently most guarantors often don't even bother to ask about past criminal records of those who apply to become federal student loan providers.

As a result, the St. Pete Times reports, some convicted felons and others with criminal records have gained entry into the guaranteed-loan program and taken advantage of the rich rewards the government bestows on lenders that participate in the FFEL program.

The newspaper's report focuses on two individuals with criminal records who managed to set up and run student loan consolidation companies based in Tampa Bay that dealt in over $300 million worth of federal loans.

According to the articles, Roger Wayne Morgan, a native of North Carolina, "earned felony convictions for safecracking, breaking and entering, and larceny following his first arrest in 1992, when he broke into a North Carolina movie theater and made off with $400 in rolled quarters." In a separate incident, he was arrested and charged with "armed kidnapping in connection with a botched ecstasy deal." Prosecutors, however, ultimately dropped the charges, "citing trouble with witnesses." Morgan also "pleaded guilty to stealing from a cash register and no contest to writing an $18,000 bad check."

Meanwhile, Joseph Pursley of Michigan had a police record that included resisting arrest and public drunkenness. He also carried enormous debt, owing at one point "$2.8-million in unpaid bills" as the result of a failed real estate venture. In 1999, the state of Michigan rejected his application to practice law after the state bar's committee on character and fitness "cited his foul temper and a 'frivolous, cavalier approach to other people's money.'"

Despite their backgrounds, neither man ran into much difficulty starting his own federal student loan consolidation businesses. These companies -- Morgan's Academic Financial Services and Pursley''s Student Funding Services -- grew to be among the top 100 companies refinancing loans in the FFEL program. "It's a great business to be in," Pursley boasted to the St. Pete Times in 2006. "There's essentially no risk for anybody buying these loans."

The good times, however, were short-lived. According to the newspaper, both companies "have collapsed amid lawsuits and a federal raid, leaving creditors, employees, and aggrieved borrowers in the lurch." In March, Morgan was arrested on 24 charges of writing bad checks. Meanwhile, Pursley's company went under in May 2007, after federal agents raided its headquarters, carting away boxes of loan documents. The agents were apparently acting on a tip they had received from a whistleblower that company officials had been forging students' signatures on loan applications.

The St. Pete Times report has justifiably raised alarms on Capitol Hill. On Tuesday, Rep. Kathy Castor (D-FL) announced that she and Rep. George Miller, the California Democrat who is chairman of the House Committee on Education and Labor, plan to introduce legislation requiring background checks be conducted on all individuals wishing to become FFEL lenders.

While all the details of the legislation have not been worked out yet, this appears to be a common-sense solution -- so common-sense, in fact, that it is unbelievable that such a requirement doesn't already exist.

At Higher Ed Watch, we urge policymakers to move quickly to address this problem, so that we can restore integrity to the FFEL program and protect students from such shady operators.

Higher Ed Roundup: Week of May 12 - May 16

Ed Policy — Thu, 15 May 2008 19:16:00 -0400

Credit Crunch Easing for Student Loan Providers?

Dept. of Ed Relaxes Preferred Lender Rules

Sallie Mae Computer Glitch Sends Credit Scores Falling

Report Illustrates Disparities Between States in Community College Use

Credit Crunch Easing for Student Loan Providers?

There were signs this week that the effects of the credit crunch on the student loan industry may be lifting. Nelnet, a Nebraska-based lender, successfully sold $1.35 billion worth of bonds backed by federal student loans this week with substantially lower financing costs than its previous sales. Industry experts took this as a positive sign that investors are becoming less wary of federal student loans, which have long been considered among the safest investments because of their implicit backing from the government. Nelnet's sale follows on the heels of favorable sales of student loan bonds by JP Morgan Chase and the Rhode Island Student Loan Authority. The latter was the first successful "U.S. municipal offering backed by student loan revenue this year," according to Bloomberg News. Speaking at a loan industry conference on Thursday, some investment banking officials expressed cautious optimism. "We've still got a long ways to go," a Bank of America representative told the Chronicle of Higher Education. "But at least we're headed in the right direction."

Dept. of Ed Relaxes Preferred Lender Rules

Just months after the Department of Education put into place new regulations governing the relationship between colleges and federal student loan providers, the agency appears to be backing off to some extent. In a letter to colleges last Friday, a top Education Department official said that as a result of the credit crunch, some colleges may have trouble complying with the requirement that they recommend no fewer than three unaffiliated lenders to their students. In such cases, colleges will be allowed to recommend fewer lenders, as long as they make clear that they are not endorsing a specific loan provider. Under criticism from groups representing financial-aid administrators and the loan industry, the Department also reversed an earlier interpretation of the rules that would have blocked colleges from including affiliated loan providers on their preferred lender lists. As long as schools list at least three unaffiliated lenders, they now can add others that have the same owners. While college and lender lobbyists applauded the Department for being flexible, some advocates for students questioned whether the agency is relaxing the rules because the student loan scandals have receded from the headlines.

Sallie Mae Computer Glitch Sends Credit Scores Falling

Nearly one million student loan borrowers saw their credit scores plunge last weekend because a computer glitch at Sallie Mae caused their accounts to be coded as delinquent. On Friday, the student-loan giant mistakenly included borrowers who have taken advantage of graduated and extended repayment plans among those who have made only partial payments, leading the credit reporting firm Equifax to label their loans as overdue. As a result of the error, some borrowers' credit scores dropped by as much as 100 points or more. A Sallie Mae spokesman said that the situation has been corrected and that borrowers should not face any penalties as a result of the snafu.

Report Illustrates Disparities Between States in Community College Use

States that charge lower tuition for community colleges have higher enrollment rates, according to a new report from the Rockefeller Institute of Government in New York. Average tuition in California, which enrolls more than 5 percent of its 18-plus aged population in community colleges was $674 whereas New Hampshire, which charges $5,614 annually, has a community college enrollment rate of less than 1.5 percent. In all states, the cost of attending a community college is less than attending a four-year college and in 18 states, the community college tuition was half that of a four-year school or less. States with the smallest population, such as West Virginia and Maine, posted the largest growth rates in community college enrollment between 2000 and 2005 (66.7 and 40.5 percent, respectively).

Student Loans in the Coming Bush Budget: Don't Get Spun

Ed Policy — Sat, 02 Feb 2008 00:00:00 -0500

Lobbyists who represent Sallie Mae, Nelnet, and the rest of the student loan industry are anxiously awaiting the arrival of President Bush's Fiscal Year 2009 Budget on Monday morning. Last year, Congress cut taxpayer subsidies to banks that make government-guaranteed student loans and put those savings into lower-cost loans and bigger Pell Grants for students. Industry lobbyists will pore over the budget the moment it comes out Monday to find numbers that make their case that it is now cheaper to subsidize their retail loans rather than continue the wholesale approach known as direct lending.

[slideshow] The difficulty for the media and Members of Congress is that industry representatives will decide which budget numbers to use and how to portray those numbers in assessing the relative costs of the two programs. Unfortunately, their paychecks require them to reach a pro-industry conclusion no matter what story the numbers actually tell.

We at Higher Ed Watch and Ed Money Watch want federal student loans delivered as efficiently as possible. In the past, we have favored direct lending and auctions for government-guaranteed loans (FFEL loans) because both designs save taxpayer dollars relative to the traditional system and those savings can be plowed into financial aid for needy students. Now, we don't know what the new numbers from President Bush's Office of Management and Budget (OMB) will show about the post-reform cost of Direct Loans versus government-guaranteed loans. If they show that the cost differential has disappeared, we will say so, and the industry lobbyists of course won't disagree with our conclusion.

But here's the rub. If the numbers indicate that Direct Loans are still cheaper, then industry lobbyists will say we're just biased, dyed-in-the-wool "Direct Loan advocates" who can't be trusted to be objective.

To prevent the industry from accusing us of choosing and spinning the numbers after we see them, we are telling you - before the Bush budget is released -- where to look to get the answer yourself. We can do this because, unlike the industry lobbyists and front groups, we don't have financial ties that anchor us to any particular conclusion.

When the budget comes out on Monday, go to the OMB FY 2009 budget documents. Assuming the information is structured the same way as last year, from the Appendix, download the Department of Education portion. In the "Office of Federal Student Aid," look for the section that probably begins in a similar way as it did last year:

The following chart compares total FFEL and Direct Loan costs on a subsidy rate basis: program costs calculated under the Federal Credit Reform Act of 1990 and comparably projected estimates of Federal administrative costs, including expenses related to FFEL program oversight and servicing the Direct Loan portfolio.

In the chart, look at the bottom-line "total" for each program for 2009 (the right-hand column). If the Direct Loan number is bigger, then the student loan industry has reason to crow, because it would represent a major shift from past years.

But whichever direction those numbers point, a caveat is important to keep in mind: eliminating what appears based on that chart to be the lower-cost program will not necessarily save taxpayers money. That's because each program currently serves different sets of schools and different sets of borrowers, and this affects each program's costs. For example, defaulted borrowers are disproportionately placed into the Direct Loan program, adding costs especially to consolidation loans in that program. If Direct Loans were eliminated, those default costs would remain in FFEL. In addition, a new Public Service Loan Forgiveness benefit is only available in direct lending. If Congress decided to eliminate direct lending, presumably the new forgiveness benefit would be preserved, shifting those costs to the FFEL program.

It will be especially interesting to see if OMB puts forth a comparison of the relative Direct Loan versus FFEL costs for like student borrowers at like schools and otherwise in like circumstances. A bigger Direct Loan relative cost there should give the banks reason to seek a Congressional Budget Office (CBO) estimate of the savings that could be achieved by eliminating the Direct Loan program. The opposite, however, should encourage Congress to consider further action to cut excess FFEL lender subsidies more and shift the savings to further increased student financial aid.

In fact, regardless, a Member of Congress should request CBO to estimate the costs or savings associated with a 100 percent FFEL system and the costs or savings associated with a 100 percent Direct Loan system. If policymakers want to continue to have two student loan delivery systems, and there are reasons to, then so be it. But let a neutral arbiter in the form of CBO identify just what the taxpayer cost of that choice is. We shouldn't have to rely on Sallie Mae's interpretation of the numbers.

Roundup: Week of September 10 - September 14

Ed Policy — Fri, 14 Sep 2007 01:00:00 -0400

Consolidation, Katrina Help Loan Default Rates Fall

The rate at which students default on their federal student loans has fallen to 4.6 percent, the Department of Education announced Monday. The new rate, for the 2005 fiscal…

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.

Roundup: Week of August 20 - August 24

Ed Policy — Fri, 24 Aug 2007 01:00:00 -0400

9.5% Program Cost Taxpayers $3.5 Billion Since 2001

From 2001 to 2006 the Department of Education paid out $3.5 billion under a subsidy program designed to guarantee nonprofit student loan providers a 9.5 percent rate of return, the

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.