Federal Student Loan Lenders Fight for Survival
In what is being viewed as a direct hit to private third-party lenders
in the Federal Family Education Loan Program who are fighting to keep the program alive, the U.S. Department of Education’s preliminary data
paints the FFEL program as a costly and ineffective system with a 7.3-percent student loan default rate, two whole points higher than the
default rate for the Direct Loan Program (“Private Lenders Brace for Fight Over Student-Loan Role,” The Wall Street Journal, March 27, 2009).
Since its launch in the 1960s, FFELP has been the primary source of federal student loans. This year the FFEL program has already lent more
than $56 billion in student loans, while the Direct Loan Program has lent just $20 billion. But President Obama has proposed axing the FFEL
program, which costs the federal government billions of dollars in subsidies each year, in favor of the government’s Direct Loan Program,
through which families borrow directly from the government.
FFELP lenders have said that the Education Department’s untimely release of the student loan default rate data — taken from fiscal year
2007 — was purely political since the government has never released preliminary default rate data and has never broken down the data by the
two programs. Industry analysts say the data reflects the differences in the two programs: FFELP lenders typically cater to more students
from for-profit schools who tend to default at a higher rate than students in the Direct Loan Program.
Department of Education officials have said they released the data in response to a U.S. Freedom of Information Act request from The
Wall Street Journal and inquiries from Congressional leaders.
“It’s unfortunate the rates are being released before there is an analysis of them,” said Brett Lief, president of the National Council of
Higher Education Loan Programs, a trade group that represents FFELP lenders and federal loan guarantee agencies. “This is very serious stuff
and I’m saddened that it has come out like this.”
No Cut-and-Dry Solution to the FFELP Dilemma
While the Consumer Bankers Association, which represents certain FFELP lenders, has sent Congress a 2,500-signature petition asking
legislators to reject the president’s proposal to eliminate the FFEL program, industry observers don’t see the battle over FFELP ending
quickly or simply.
The Congressional Budget Office has said eliminating the program would save the government nearly $100 billion over the next 10 years, which
President Obama plans to redirect to the Federal Pell Grant program. This potential funding boost for Pell Grants, which are awarded to the
nation’s neediest students, could make it harder for legislators who support FFELP to successfully argue to keep the program alive.
However, some legislators who oppose the FFEL program face strong opposition from their home-state guarantee agencies that work with FFELP
lenders to service college loans for students in their state. Legislators may also have to battle student loan giant Sallie Mae, which has
said that keeping certain elements of FFELP might actually make it possible for the government to draw additional Pell Grant funding from
FFELP itself. Sallie Mae has also pointed out that its borrowers, who partake in default prevention programs through state loan-guarantee
agencies, are 30 percent less likely to default than direct loan borrowers.
“It’s certainly possible Congress would eliminate the program,” said Terry Hartle, a senior vice president of the American Council of
Education, a trade group representing colleges and universities. “But it’s equally possible — and perhaps more so — to wring more savings
out of the [FFEL] program and put the savings into Pell.”