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.  

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.

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.

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.

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 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:

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).

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

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.

[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.