Auctions

On Monday, the U.S. House of Representatives gave in to pressure from the student lending community by agreeing to a one year postponement of the pilot PLUS loan auction that was slated to begin just under two weeks from now. The Senate is expected to follow suit.

Auction opponents are on the verge of winning the delay because they have threatened to not participate and have made claims that the competitive bidding process rests on too much uncertainty for all involved. We understand why these claims would resonate with lawmakers, but the facts of the auction process simply don't bear them out. Instead, the fear and panic raised by the auction's detractors resulted in an unnecessary game of chicken between lenders and Congress. It's clear who blinked first.

The House included the delay as part of legislation it approved on Monday that aims to make mostly technical corrections to legislation it passed last summer reauthorizing the Higher Education Act. The bill is still waiting on Senate action before it can head to President Obama's desk, though little opposition is expected.

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At Higher Ed Watch, we hate to see journalists get played by the student loan industry. But that's just what happened last week when two well-respected national publications -- The Wall Street Journal and The Chronicle of Higher Education -- ran articles in which they mischaracterized the upcoming PLUS Loan Auction, a program that private lenders and some groups representing financial aid administrators oppose.

Reporting on efforts by the National Association of Student Financial Aid Administrators to delay implementation of the auction program, the two newspapers claimed that the auction was designed to cut federal subsidies for private lenders ("Schools Seek Delay in Move to Cut Subsidies to Student Lenders," the Wall Street Journal proclaimed). This assertion echoes the loan industry's talking points and is just plain wrong. In fact, the auction allows for a subsidy increase for lenders making PLUS loans.

Are private student lenders and their allies in the financial aid world thankful for the credit crunch? If they can use the market turmoil as an excuse to torpedo the PLUS loan auction set to begin this year, they may very well be.

Education Secretary-Designate Arne Duncan will appear before the Senate Heath, Education, Labor, and Pensions Committee for his confirmation hearing on Tuesday morning. While Higher Ed Watch won't be there to grill Duncan, we do have some tough questions on higher education policy for the Chicago Public Schools chief. Feel free to suggest ones of your own.

(1) Do you believe that the federal student aid programs, as currently designed, are appropriately targeted and work both efficiently and effectively in expanding college access, or do you believe that the programs need to be overhauled to ensure that the doors of college remain open for low-income and working-class students?

(2) Do you expect the administration to continue supporting both the Direct and Guaranteed Student Loan Programs or instead push for a 100 percent Direct Lending model given research that shows this program is less costly to run?

(3) As currently designed, federal higher education tax credits disproportionately favor middle- and upper-income families and are largely unavailable to low-income families due to the fact that they are nonrefundable and have limitations on the costs that they cover (tuition and fees versus cost of attendance). Given that the federal student aid system was created to increase the enrollment rates of those who could not otherwise afford to attend, are tax credits an efficient way to deliver limited student aid resources? Has the administration given any thought to revamping the current tax credits so they are available to lower-income families? What steps do you anticipate taking to ensure that the President-elect's proposed American Opportunity Tax Credit is available to low-income students who may have trouble meeting the 100 hour service requirement due to family and work responsibilities?

Last month Secretary of Education Margaret Spellings wrote to Sen. Edward Kennedy (D-MA) asking that Congress retroactively change the way the federal government sets lenders subsidies in the guaranteed student loan program. This request has received little attention from the press given its arcane nature.

At issue is the index the government uses to set subsidy payments to lenders. Currently, subsidy payments are indexed to commercial paper interest rates, but securitization markets prefer to operate on LIBOR, a different index. In her letter, Secretary Spellings says that "volatility in the financial markets" has caused a major mismatch between the two indexes that could "have a severe impact on lenders' ability to make loans." She urges Kennedy to change the index "as quickly as possible."

While we appreciate the Secretary's concerns, this is not a matter that should be rushed or handled through behind-the-scenes policy negotiation. What Spellings has proposed is unprecedented, could be costly to taxpayers, and again highlights the desperate need for long-term reforms in the Federal Family Education Loan (FFEL) program.

Barack Obama's historic victory last night ensures that a change in direction is coming to the U.S. Department of Education and hopefully to federal higher education policy.

Starting tomorrow, we will take a closer look at Obama's signature higher education proposals. (Got to give him at least a one day honeymoon, right?) Today, we will present our wish list for the incoming administration. Here are some changes we would like to see:

• Emphasize Oversight and Enforcement at the Department of Education: Over the last eight years, the Bush administration officials in charge of the Department looked the other way as widespread abuses occurred in the Federal Family Education Loan (FFEL) program. To this day, the Department has not disciplined a single lender for violating a federal law that prohibits loan providers from offering inducements to secure student loan business. At the same time, the education secretary allowed lenders to keep more than $1 billion they illegally obtained in improper subsidy payments. Federal leadership is sorely needed to protect the integrity of the federal student loan programs, for the sake of both the students who depend on them and the taxpayers who finance them. For starters, the new administration should take a close look at the conflict-ridden relationship between Sallie Mae and USA Funds, the guarantee agency it effectively controls. As we have noted, there is compelling evidence that the loan giant has exploited this arrangement to take advantage of borrowers who are having difficulty repaying their federal loans. A thorough investigation is needed.

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.

They're the middlemen of the Federal Family Education Loan (FFEL) program, they engage in some ill-defined activities outside their purview, and in many cases are closely linked to loan companies. Now, thanks to the reauthorization of the Higher Education Act, guaranty agencies will also be playing a key role in the pilot PLUS loan auction program.

As we've written previously, the pilot PLUS loan auction is an opportunity to harness market forces (credit market emergencies notwithstanding) to determine the ideal subsidy lenders should receive in exchange for originating student loans. Lenders will bid for one of two spots to exclusively originate PLUS loans in a state, and will keep that authority for two years. [More on the student loan auction can be found on our Federal Education Budget Project Web site.]

The reauthorization of the Higher Education Act improved upon this program by introducing penalties for lenders who win an auction but fail to follow up on their commitment by not making all PLUS loans in a state. These disciplinary measures include reducing the subsidies lenders receive on other loans, banning them from participating in future auctions, or kicking them out of the FFEL program altogether. These measures should ensure that only serious lenders submit a bid.

By Jason Delisle and Stephen Burd

The Wall Street Journal reported yesterday that Sallie Mae is in a contract dispute with the U.S. Department of Education over the agency's plan to purchase federal loans from private lenders that are struggling with liquidity as a result of the credit crunch.

According to the newspaper, Sallie Mae has filed a formal protest with the Government Accountability Office over the Department's decision to put its current Direct Loan servicer, Affiliated Computer Services Inc., in charge of collecting on these loans for the government without putting the contract out for bid. In other words, Sallie Mae is saying that the Department should have held an auction for the contract to service those loans.

Oh, the irony is rich here. Sallie Mae is making the case that a government program run by private businesses should be subject to competitive bidding, so that the lowest cost and best equipped company for the job is ultimately hired. Surely Sallie Mae is arguing that this competitive approach saves money for taxpayers. Too bad the student loan giant has rejected this same argument when policymakers proposed using a competitive bidding process to determine the rates at which the government subsidizes lenders in the Federal Family Education Loan (FFEL) program.