College Access

According to recent reports, some lenders are pulling out of the Federal Family Education Loan (FFEL program due to malfunctioning credit markets - and, some loan industry officials say, due to cuts in federal subsidies. The authors of these reports appear to believe that fewer lenders is bad news. But is it necessarily bad to have fewer lenders participate in the FFEL program and better to have more? Are there too many now or too few?

These questions expose FFEL’s fundamental policy flaw. An auction system, like the one Congress enacted for PLUS loans set to begin in 2009, provides the remedy.

FFEL Can’t Get it Right

The FFEL program's fundamental policy flaw is that it is not designed to ensure that an optimal number of lenders (or any lenders at all) participate in the program at a reasonable price for taxpayers. The result is a continuous debate about how much lenders should be subsidized to ensure that "enough" lenders participate in the program.

More lenders in the program ensures a well capitalized program and greater competition for school and student business, fostering better customer service. On the other hand, more lenders in the FFEL program requires higher subsidies and costs taxpayers more money, making fewer dollars available for say, student grants or other priorities. Unfortunately, Congress, the media and student loan lobbyists never confront these tradeoffs head on. A framework is therefore needed that forces policymakers to be explicit about the tradeoffs. The PLUS auction provides that framework.

With Democratic Senators Barack Obama and Hillary Clinton continuing to slug it out for their party's Presidential nomination, we've decided to highlight some of their key higher education policy proposals. Sen. John McCain, the presumptive Republican nominee, has not yet offered a detailed plan on these issues.

Last week we took a look at the proposals offered by Hillary Clinton, the junior Senator from New York. Today we examine those of her challenger, Sen. Barack Obama. The junior Senator from Illinois laid out his education plans in November.

Obama's plan for higher education would:

Increase Federal Financial Aid and Make It Easier for Students to Apply for Aid

With Democratic Senators Hillary Clinton and Barack Obama continuing to battle it out for their party's Presidential nomination, we thought that it might be helpful to our readers to highlight some of their key policy proposals related to higher education. Sen. John McCain, the presumptive Republican nominee, has not yet offered detailed plans on these issues.

Today, we will take a closer look at the proposals offered by Hillary Clinton, the junior Senator from NY. Overall, her College Aid Plan, which she announced in October 2007, would increase federal student aid spending by $8 billion. She would finance this spending by eliminating the Federal Family Education Loan (FFEL) program and freezing the estate tax at $7 million per couple (instead of allowing it to be repealed).

Her plan would do the following:

Increase Federal Financial Aid Funding and Make it Easier for Students to Apply for Aid

Study Reports Record Congressional Earmarks for Higher Ed

Unforeseen Consequences from Changes in Texas Admissions Policies

Concern about Credit Cards on College Campuses

In trying to raise panic over the student loan crunch, much of the student loan industry has had a not so hidden agenda: to get Congress to revisit lender subsidy cuts it made last fall.

Beware of Propaganda

The goal of reversing subsidy cuts became especially clear last week when Higher Education Washington Inc. (HEWI), a publication owned and operated by a top student loan industry lobbyist, published an article claiming there were "increasing signs that at least some in Congress will attempt to revisit the College Cost Reduction Act -- specifically, the elimination of $18 billion in subsidies to private lenders."

The article's proof for this claim: statements in favor of restoring the subsidies made by Rep. Howard "Buck" McKeon (R-CA) and Sen. Ben Nelson (D-NE). There's just one problem. McKeon and Nelson, both strong supporters of the loan industry, have never wavered in their opposition to recently enacted lender subsidy cuts.

In fact, Nelson, who has strong ties to the Nebraska-based loan company Nelnet, unsuccessfully tried to get the Senate to scale back the size of the subsidy cuts last summer when the College Cost Reduction Act first came up for a vote in that chamber. (He lost 61-36.) Now, in a statement he issued this month, he laid the blame for the loan industry's current troubles at least in part on his Senate colleagues for having defeated his amendment:

Students at Trade Schools Most Likely to Borrow, New Study Shows

Changes Ahead in Future Applicant Pool

Ed Dept. Officials Reassure Students of Loan Availability

Behind closed doors, Members of Congress are battling over a key concept in the pending Higher Education Act reauthorization -- a House of Representatives generated requirement that states maintain steady fiscal support for higher education. Not only should Congress ensure this concept makes it through to President Bush’s desk, it should strengthen the requirement to make it more than a toothless accountability measure.

Kennedy Offers Amendment to Increase Fed. Loan Limits

Lawsuit Alleges Online University Bilked Billions from Ed Dept.

Two Companies Announce End to Controversial Loan Programs

At a time when an irrational panic appears to have swept over financial markets, everyone needs to act responsibly and make sure not to unnecessarily raise people's fears and promote bad public policy. The stakes are too high for opportunism or sensationalism. Unfortunately, when it comes to reporting the effect of the credit crunch on student loans, some in the media are being misled and unwittingly causing widespread panic that college loan funds are drying up. They're not.

Take, for example, The Washington Post's recent front page story, "Credit Crisis May Make College Loans More Costly: Some Firms Stop Lending to Students." The article begins with an ominous lede: "Many college students across the nation will begin to see higher costs for loans this spring, while others will be turned away by banks altogether as the credit crisis roiling the U.S. economy spreads into yet another sector." It wouldn't surprise us if some high school seniors in the DC metropolitan area, who are on the bubble about applying to college this year, read that front page lede and thought for at least a moment, "why bother?"

With any panic, there comes a point when cool heads have to stop saying “don’t worry” and start offering solutions to real and perceived phenomena. Unfortunately, we’ve reached that point when it comes to fears about the credit crunch and student loans. Today, we float some policy options.

To be clear, we at Higher Ed Watch continue to believe there is no federal student loan crisis. There is zero danger that federal Stafford loans will not be available to every student in the foreseeable future, regardless of their credit history or income. Even if 100 or more lenders close shop, there will continue to be over 2,000 federal student loan providers, including big banks, such as JP Morgan Chase, which recently hired ex-Nelnet workers and announced a voluntary reduction in federal student loan interest rates and fees.

In fact, this week the Consumer Bankers Association said that “despite a series of negative developments that have increased their costs and reduced their margins, banks plan to continue making both [federal] and private loans in academic year 2008-2009. Joe Belew, the association’s president, said that banks “have a decades-long commitment to the student loan business,” and even as some lenders pull out, “some banks plan to expand their lending in the upcoming academic year to ensure that students have the funds they need.”