Non-Profit Lenders

As part of its efforts to cut the federal budget deficit, Republican leaders in the House of Representatives are considering trying to rescind spending on programs that Congress included in the student loan reform legislation it approved last year. In a report accompanying the House-passed fiscal year 2012 budget resolution, the budget committee’s leaders argue that the legislation, which eliminated the Federal Family Education Loan (FFEL) program and shifted the federal student loan program to 100 percent direct lending, did not produce enough savings to fully finance these initiatives. [Our sister blog, Higher Ed Watch, made a similar point when the bill was being debated.]

At issue is a fight over how the bill was “scored.” Under current law, the Congressional Budget Office (CBO) abides by rules established by the Federal Credit Reform Act of 1990 to estimate and report the cost of new federal student loans that are expected to be made in the current and future years. Using this approach, CBO in March 2010 reported that moving all FFEL schools into the Direct Loan program would provide the government with savings of $68 billion over eleven years.

Republican lawmakers, who nearly unanimously opposed the legislation, argued, with some justification, that this estimate did not provide an accurate prediction of how much money the transition to direct lending would save. Many budget experts believe that estimates calculated using Credit Reform rules tend to understate the costs of federal loan programs by excluding a full measure of the cost of the loans. Thus government’s student loan programs appear profitable for the government even though they are making loans with below-market rates and repayment terms that are universally available to students regardless of their credit history.

With these concerns in mind, Sen. Judd Gregg (R-NH) asked the budget office to re-score the bill using a “market cost” or “fair value” approach -- which many experts, including the CBO, have said provides the most comprehensive measure of a loan program’s costs. Such estimates show the price private entities would charge to offer the same benefits and services -- and bear the risks they entail -- currently offered by the government. As a result, they say, this accounting method more fully reflects the risks that taxpayers bear in making heavily-subsidized loans.

In response to Senator Gregg’s request, the CBO revealed that under the market-based estimates, the amount the government would save from making the switch dropped to $40 billion over eleven years. Despite the fact that the CBO estimate showed that Direct Loans were still much cheaper than FFEL loans, senior Republican lawmakers trumpeted the report, arguing that it showed that Democrats had misrepresented the savings the legislation would produce.

Democratic Congressional leaders, however, rejected this argument and accused the Republicans of “trying to cook the books,” in requesting the fair-value cost estimate. They said they saw no reason to doubt the CBO’s official cost estimate and, therefore, would stick with it.

Now the Republican leaders of the House Budget Committee are taking the Democrats to task over this decision. Noting that the President’s Commission on Fiscal Responsibility and the Peterson-Pew Commission on Budget Reform have recommended that policymakers use “fair-value accounting for all Federal loan and loan guarantee programs to enable the true assessment of their cost to taxpayers,” the committee report says that the legislation’s authors spent more than they could afford. To remedy the situation, the report says that Congress should consider cancelling “future spending [provided in the 2010 law] in the following ways":

• Repeal the expansion of the Income-Based Repayment [IBR] program: The final legislation included a provision, proposed by the Obama administration, to increase repayment relief for financially distressed student loan borrowers. Currently, borrowers in IBR do not have to make payments on their federal Stafford loans that exceed 15 percent of their discretionary income, and can have their remaining debt forgiven after 25 years. Under the bill, starting with students who take out their first loan after 2014, the cap is reduced to 10 percent, and outstanding debt can be forgiven after 20 years. Noting that program, which was created in 2007, is “relatively new,” the report states that “Congress should ensure the program is meeting its intended goals before it is expanded.” Eliminating this provision would save about $1.5 billion over 10 years (although nearly all the savings would occur in the last five years of that time period). The savings would also likely be higher using fair-value estimates, since that accounting method likely shows the IBR repayment option provides greater subsidies to borrowers than the official rules.

• Eliminate new funding included in the legislation for the College Access Challenge Grant program, which provides matching grants to states to support efforts to prepare more low-income students to enroll and succeed in college. The student loan reform bill “dedicated mandatory spending to this discretionary program regardless of its effectiveness and created a ‘funding cliff’ with resources abruptly terminating in 2014. Killing this provision would save about $750 million over five years.

• Eliminate a set-aside that the legislation created for non-profit lenders to service Direct Loans. The legislation “established two separate funding categories for Direct Loan servicing contracts, a mandatory stream for eligible non-profit servicers and a discretionary stream for other servicers,” the report says. “Both of these types of servicers should be funding with discretionary funds.” As Higher Ed Watch reported last week, canceling the mandatory carve-out for non-profit servicers could save the government $730 million over five years and $1.2 billion overall, based on the original cost estimates of the provision done by the Congressional Budget Office in 2010.

• Eliminate mandatory funding that the legislation included to provide competitive grants to community colleges that serve dislocated workers in order for them to expand and improve their online course offerings. Funding for this program comes from the Department of Labor’s Trade Adjustment Assistance program, which had never been funded previously. “This is a discretionary program that should not be funded with mandatory funds,” the report states. This proposal would save $2 billion over five years.

Democratic Congressional leaders and Obama administration officials are likely to again reject the House Budget Committee’s complaints about how the student loan reform bill was scored. But given the intense pressure on Capitol Hill and the White House to slash the federal budget deficit and find money to shore up the Pell Grant program, they may have little choice but to give at least some of these proposals a second look.

At Ed Money Watch, we will continue to watch these developments closely. Stay tuned.

As the White House and Congressional leaders look for areas of wasteful government spending to cut, we would urge them to consider eliminating a set-aside for non-profit student loan agencies that Congress created as part of last year’s student loan reform legislation.

The Health Care and Education Reconciliation Act of 2010 ended the Federal Family Education Loan (FFEL) program and shifted the federal student loan program to 100 percent direct lending. As a result, student loan corporations are no longer allowed to originate federal student loans, such as Stafford Loans and GRAD PLUS loans. But some of these companies can continue to participate in the federal student loan program by servicing Direct Loans on behalf of the government. In other words, these companies can help the U.S. Department of Education to administer the Direct Loan program but can’t make loans themselves -- which is a far less lucrative arrangement.

It's been a good week for supporters of wealth-building. On the last day for this year's bills to make it out of committee alive, California's Banking Development Districts bill was voted out of the Senate Appropriations committee yesterday, on a 7-4 vote. 

One way or another, the whistle-blower lawsuit filed by Jon Oberg, the U.S. Department of Education researcher who uncovered the 9.5 student loan scandal, against six student loan companies that participated in the scheme should be resolved shortly.

The parties are currently in the third-day of court-ordered settlement talks to resolve the lawsuit, which seeks the return of approximately $1 billion to the government in overpayments these lenders improperly received. If the negotiations break down, the case is scheduled to go to a jury trial in the U.S. District Court for the Eastern District of Virginia on Tuesday.

The defendant with the most to lose in the case is Nelnet, the Nebraska-based loan company that was the most aggressive participant in the scheme, reaping about $300 million in excess federal subsidy payments from the government. The other defendants are: Brazos Higher Education Services Corporation (Texas), Education Loans Inc. (South Dakota), Panhandle Plains Higher Education Authority (Texas), Sallie Mae, and Southwest Student Services Corporation (Arizona). Brazos and Oberg have tentatively reached a settlement, the terms of which are now under review by the Justice Department.

As we have repeatedly said, this case should finally resolve many of the unanswered questions surrounding the scandal -- a goal we have been pursuing at Higher Ed Watch over the last couple of years. After doing a careful review of court documents publicly available on PACER (Public Access to Court Electronic Records), here are some of the truths that we believe have been revealed:

In an office building penthouse with 360 degree views of San Francisco, two groups of young people taught each other, and us, why it is so important to start saving your money young.

You can’t wait until you’re like, fifty, because “that’s hella old.” So spoken by one of the girls participating Friday's training for PLAY, the singular prize-linked youth savings program (description attached). The first of its kind in the nation, PLAY is run by the Mission SF Community Financial Center, the non-profit arm of the Mission SF Federal Credit Union.

Which student loan industry group has the most clout in Washington? Judging by the student loan reform bill that Congress is poised to enact, the hands-down winner would have to be the Education Finance Council (EFC), a trade association for non-profit student loan companies. The organization has clearly benefited from the common perception on Capitol Hill that non-profit student loan agencies are more upstanding than their for-profit peers -- which, as we’ve said before (see here and here), is a dubious proposition indeed.

As we recently reported, the pending legislation, which would eliminate the Federal Family Education Loan (FFEL) program, includes a set-aside for non-profit loan agencies taken from a proposal that EFC quietly shopped around Capitol Hill last summer (and that Higher Ed Watch was the first to make public). The measure would give each and every one of EFC’s nearly 30 members a no-bid contract to service the Direct Loans of up to 100,000 students attending institutions in their home states.

Just how big a benefit will this be for the association’s members? Consider this: while most of the student loan industry is warning of the job losses that will occur after the bill passes (claims that in many cases have been wildly exaggerated), a top official with the Missouri Higher Education Loan Authority (MOHELA) has indicated that his agency will soon be posting job ads. “It’s very possible we’ll need to hire 400 to 600 more people,” Will Shaffner, the agency’s director of business development, told the St. Louis Post-Dispatch earlier this week.

At Higher Ed Watch, we have repeatedly stated our opposition to this provision, which is obviously a giveaway to wavering Democrats with close ties to the loan agencies in their states. We find this provision particularly troublesome because the history of FFEL is replete with these types of political tradeoffs and carve outs, which have made the program administratively cumbersome, inefficient, and vulnerable to waste, fraud, and abuse.

To be absolutely clear, we have no problem with encouraging non-profit lenders to compete for a servicing contract from the Department of Education. But they should not be treated more favorably -- or compensated more generously -- than their competitors.

As our readers know, Higher Ed Watch has followed the debate over President Obama’s proposal to eliminate the Federal Family Education Loan (FFEL) program and shift to 100 percent direct lending quite closely. In fact, we have written 60 blog items on that topic over the last year. Now that Congress is on the cusp of completing work on legislation enacting the president’s plan, we thought it would be a good time to highlight the best of our coverage. We have chosen a dozen posts that we hope brought clarity to a complex debate and kept our readers informed of the back-room deals and political maneuvering going on behind the scenes:

Late last week, the student loan company Nelnet acknowledged for the first time that it has subpoenaed the U.S. Department of Education for records it believes will definitively show that the Bush administration had approved the company’s plans to aggressively grow its 9.5 percent student loan holdings. Higher Ed Watch broke the story in a blog post earlier this month.

In an interview with the Lincoln Journal Star, Ben Kiser, a spokesman for Nelnet, defended the company’s decision to issue the subpoena, saying that it would provide the corporation with evidence it needs to fight a whistleblower lawsuit brought by Jon Oberg, the former Education Department researcher who uncovered the 9.5 student loan scandal. In December, a federal court judge allowed the lawsuit, which seeks the return to the federal government of $1 billion in taxpayer subsidy overpayments, to proceed against Nelnet and five other student loan companies.

“In order to defend against the groundless claims in the lawsuit, it is natural that Nelnet would request documents in the Department’s file,” Kiser told the newspaper. “Since the government elected not to intervene and prosecute the case, a subpoena to the Department is the proper way to obtain this evidence.”

As we have previously stated, the release of these documents could be a major breakthrough in helping to resolve some of the long unanswered questions surrounding the Bush administration’s role in the 9.5 student loan scandal. Specifically, we hope that these records, which are likely to become public as the lawsuit progresses, will provide answers to the following questions: what did the Education Department’s former political leaders know about the lenders’ scheme to gain windfall profits, when did they know it, and why did they take so long to do anything about?

Higher Ed Watch has learned that the student loan company Nelnet recently had a subpoena issued to the U.S. Department of Education for documents it believes will definitively show that the agency's former leaders signed off on the company's plan to aggressively grow its 9.5 percent student loan holdings. Nelnet took this action shortly after a federal court judge ruled in favor of allowing a False Claims lawsuit filed by Jon Oberg, the former Education Department researcher who uncovered the 9.5 student loan scandal, to proceed against the company and five other lenders.

The release of these documents, which are likely to become public as the lawsuit progresses, could be a major breakthrough in helping to resolve some of the long unanswered questions surrounding the Bush administration’s role in the 9.5 student loan scandal. Specifically, what did the Department’s former political leaders know about the lenders’ scheme to gain windfall profits, when did they know it, and why did they take so long to do anything about it?

Once again, San Francisco is lending a helping hand to its hardworking residents. On Thursday, Mayor Gavin Newsom and City Treasurer Jose Cisneros will launch Payday Plus SF, a low cost emergency loan program as an alternative to the city’s many payday lenders.

The program is the natural result of adding a dense concentration of highly-motivated asset building advocates to a dense concentration of high-interest payday lenders. And in contrast to some payday loans, its numbers make sense.