Direct Lending

Playing the Class Warfare Card

The student loan industry's campaign to save the Federal Family Education Loan (FFEL) program may have just hit a new low. Industry officials appear to be trying to stoke middle-class anger over President Obama's proposal to use the savings from ending FFEL to make the Pell Grant program into a true entitlement for low-income students.

Don't take our word for it. Just listen to what lobbyists for banks and student loan guaranty agencies have been saying lately:

"The president's plan, although touted as a means of promoting higher education, is not," Marcia Sullivan, director of government relations for the Consumer Bankers Association, said in a prepared statement. "The plan does not reduce the cost of student loans for a single student. Students and parents need to know that under this proposal, the government's profits on student loans borrowed by middle income students will be used to finance other student aid." -- "Obama Slams Lenders and Colleges," Inside Higher Ed, April 27, 2009 [Emphasis added]

"The proposal does nothing for the 10 million borrowers that need loans to pay for their education and training. In this interest environment, with rates close to zero, student borrowers should not be paying 6 percent interest for their loans. Therefore the needy students that do borrow are subsidizing the increase in Pell Grant awards." -- Press release from the National Council of Higher Education Loan Programs (NCHELP) on Obama's plan [Emphasis added]

The Fight is On

Last week brought answers to two key questions that could be pivotal to President Obama's proposal to overhaul the federal student loan programs.

Ever since the administration introduced its plan in February to eliminate the Federal Family Education Loan (FFEL) program and use the savings to turn the Pell Grant program into a true entitlement for low-income students, the proposal's supporters have wondered whether the president would truly throw his weight behind it. In other words, they wanted to know whether Obama was invested enough in the plan that he would use the nation's most powerful bully pulpit to fight for it.

The plan's supporters also wondered whether the president had enough political clout to persuade wavering Democrats in Congress to move forward with a controversial budget procedure that would make it significantly easier for him to get the votes he would need to achieve his goal. As we have said previously, many Congressional Democrats have close ties to the student loan industry (or "constituent interests," as Sen. Kent Conrad (D-ND) said of his relationship with the Bank of North Dakota, the country's only state-owned bank).

Thankfully, as we learned late last week, the answer to both these questions is  "Yes."

President Obama put advocates' concerns to rest on Friday when he held an event at the White House in which he vowed to do battle with the student loan industry. "The banks and the lenders who have reaped a windfall from these subsidies have mobilized an army of lobbyists to try to keep things the way they are," he said. "They are gearing up for battle. So am I."

Sallie Mae’s Self-Serving Proposal

At Higher Ed Watch, we would be remiss if we didn't salute Sallie Mae for acknowledging in its student loan proposal that there is significant waste in the Federal Family Education Loan (FFEL) program and that the time has come for fundamental reform. We couldn't agree more.

Sallie Mae's plan, however, seems to be primarily designed -- surprise, surprise -- to maintain and even significantly expand the loan giant's predominance over the federal student loan program. Because of its size and economy of scale, Sallie Mae is a clear favorite to be one of a handful of student loan companies to win a highly coveted servicing contract from the U.S. Department of Education. As a result, the proposal would allow the company to make loans; sell them to the Department for a fee; and earn another payment  from the government for servicing these loans. In addition, Sallie Mae would be paid to service Direct Loans and other loans made by lenders that don't wish to or cannot comply with servicing standards put out by the Department.

While the plan might make some sense politically (the more lenders buy in to change, the less resistance), it makes little sense from a public policy point of view. Why should the government pay lenders to originate loans when it can make the loans itself at a lower cost? Isn't part of the point of student loan reform to stop subsidizing unnecessary middlemen?

Sallie Mae's Full Court Press

The U.S. Department of Education will soon make a decision that could fundamentally reshape the student loan marketplace.

The Department has chosen six companies, including the student loan giant Sallie Mae, to compete for a lucrative contract to service tens of billions of dollars of Federal Family Education Loans (FFEL) sold to the government under the Ensuring Continued Access to Student Loans Act (ECASLA). But in the wake of President Obama's proposal to eliminate FFEL and provide federal loans entirely through Direct Lending, the stakes have been raised significantly. The winning bidders could be the last student loan companies standing, in charge of servicing all loans made in the future under the Direct Lending program.

As Tim Ranzetta recently wrote on his well-respected blog Student Lending Analytics, "This contract is the game-changer that will determine the landscape for student loans in the years to come."

Given the high stakes involved, you would think that the Department would do all that it could to ensure that the loan companies it is considering have spotless records when it comes to servicing and collecting on student loans. But judging by some of the companies that are involved in the competition and comments recently made by the agency official in charge of the bidding process, this does not appear to be the case.

Obama’s Trump Card

Prospects for President Obama's proposal to eliminate the Federal Family Education Loan (FFEL) program remain uncertain. Democratic leaders in the U.S. House of Representatives and the Senate continue to be divided over whether or not to go forward with a controversial budget procedure known as budget reconciliation, which would make it significantly easier for the President to get the votes he needs to achieve his goal.

But even if the White House fails to persuade Congress to move ahead with its plan this year, the student loan industry will not be able to rest easy. That's because the administration has a trump card up its sleeve. An emergency law that is currently propping up FFEL-- the Ensuring Continued Access to Student Loans Act (ECASLA) -- is set to expire in about a year and a half, and the Obama administration doesn't appear to have any intention of asking Congress to renew it.

Robert Shireman, a senior advisor at the U.S. Department of Education, said as much at an event here last week on "The Future of Federal Student Loans" when he responded to a concern that the administration  was rushing through its plans to overhaul the federal student loan programs. Regardless of whether the proposal to end FFEL goes through, "ECASLA only goes until this next coming year," he said. "A decision has to be made."

Debunking Student Loan Industry Myths

In their fight to maintain the Federal Family Education Loan (FFEL) program, loan industry officials have made a lot of dubious claims about the dangers of direct lending. Jason Delisle, the research director of New America's Education Policy Program, took on these arguments in remarks he made yesterday at an event here on "The Future of Federal Student Loans." The commentary below is excerpted from Delisle's remarks (with a few tweaks for the sake of clarity).

Here are the lenders' arguments and Delisle's responses:

Claim: Having the government make all federal student loans directly will substantially increase the national debt.

Response: The argument that the loan industry is trying to make here is that because in the Direct Loan program the government is lending directly, it has to borrow to make the loan. So in that sense, when it issues a $2,000 loan, the federal government borrows the $2,000 from somebody else to make the loan. And in that regard, yes, the national debt is going up. But when a lender makes a loan on behalf of the government in the FFEL program, the federal government is on the hook for 97 percent of the principal of the loan. So, essentially the risks and obligations to the taxpayer of both of those loans are nearly identical. And to suggest that somehow we don't have an increase to the national debt when the bank makes a loan that taxpayers are on the hook for is totally absurd.

End it or Mend it?: A New America Debate on FFEL's Future

Should the Federal Family Education Loan (FFEL) program be mended or ended? That was the subject of debate at an event on Tuesday hosted by the New America Foundation's Education Policy Program.

On one side was Robert Shireman, a senior advisor at the U.S. Department of Education, who helped write the Obama administration's plan to sunset the FFEL program and use the savings to turn the Pell Grant program into a true entitlement for low-income students by financing it entirely through mandatory funding. The recent turmoil in the financial markets, he said, has exposed the risks that the federal government takes on by relying on private lenders to make government-backed loans to students. Without federal intervention, the whole program could have collapsed. "It's not a system that assures that the loans are actually made," he stated.

On the other side were representatives of the student loan industry, who urged the administration to abandon the proposal, which they said would be harmful to students, and instead work with them to reform the program. "I do believe the administration is approaching this from a sincere belief that they want to do the right thing and lenders, for the most part, don't disagree with what the administration is trying to accomplish," said Scott Fleming, director of the Chartwell Education Group, a lobbying firm that has represented lenders. "It's simply that we disagree with how they put it in practice."

Higher Ed Roundup: Week of March 23 - March 27

Budget Fight Ahead Over Obama's Plan to End FFEL

Default Rates are Up, Particularly in FFEL

New America to Host Event on "Future of Federal Student Loans"

Briefly Noted...


News Alert: CBO Finds Administrative Costs to be Higher in FFEL

The Congressional Budget Office (CBO) released student loan estimates this week showing that the federal government spends significantly more to administer the Federal Family Education Loan (FFEL) program than it does to run the U.S. Department of Education's Direct Loan program, thanks to student loan guaranty agencies.

This finding blows a hole in a key argument that the student loan industry and its supporters have long relied on to cast doubt on government estimates showing that FFEL loans cost more than those made through direct lending. Lenders have argued that the government's administrative costs are substantially higher in the Direct Loan Program than in FFEL. Industry officials have been able to make this claim because in the past, federal budget officials have left out from their estimates a very big piece of FFEL administrative costs: guaranty agency fees. But not anymore.

This year, for the first time, CBO included federal payments to guaranty agencies in FFEL program administrative costs. As shown in the table below, administrative costs in 2009 are expected to be $1.3 billion for FFEL and $700 million for direct loans.

Whispering in the Ears of Aid Administrators

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

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

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