The Plot Thickens for the Future of Student Lending
It’s “all hands on deck” for federal student loan lenders. The banks
and third-party student loan providers that make up the Federal Family Education Loan Program have made it abundantly clear that they’re not
going to roll over and accept the terms of the Obama administration’s proposal to axe their loan program in favor of the Education
Department’s Direct Loan Program without a fight, The New York Times reports (“Plan to Change Student Lending Sets Up a Fight,” April 12,
2009)
“We can either meet or beat the budget savings that are in the president’s budget with the exact same system that we have got working now
with maybe a few tweaks,” said Albert Lord, chief executive of Sallie Mae, the largest student loan provider participating in the FFEL
program.
According to Congressional Budget Office calculations, establishing the Direct Loan Program as the sole provider of federal student loans is
projected to save the government $94 billion over the next 10 years, savings that President Obama has said would be funneled directly into
the federal Pell Grant Program for low-income students.
Lender-Proposed Alternatives Come Up Short
Lord and other FFELP lenders who oppose the administration’s plan are pushing for a compromise between the Obama plan and the current system
that would allow them to continue offering students valuable lending services — quality customer relations, billing, and default prevention
and collection — and still achieve Obama’s goal of saving taxpayers money.
FFELP lenders say such dually-beneficial partnerships are possible, which can be evidenced by a compromise that Congress approved last year
that allows FFELP lenders to originate student loans using federal money and to resell the loans back to the government. FFELP lenders,
which provide more than $56 billion of the nation’s federal student loans, were able to continue making loans to families and the government
was able to ensure that families still had access to federal student loans.
But the savings Sallie Mae projects under its compromise plan still only add up to about 82 percent of the president’s savings goal over the
next five years.
Supporters of the president’s plan say that this savings shortfall, as well as the fact that FFELP lenders are still relying on the
government’s help to retain lending capital, raises the question, “why do we even need private lenders,” asked Representative Timothy
Bishop, D–N.Y., a former provost of Southampton College.
Bishop argues that expanding the Direct Loan Program, which provides federal student loan funds directly to more than 1,500 schools is
“obvious and long overdue,” being that over the last few decades private lenders have earned huge profits at relatively no risk because the
government guarantees repayment up to 97 percent.
Factional In-Fighting Could Favor Lenders
In addition to battling lenders, lawmakers are also fighting an internal battle. Republicans say Obama’s plan is just another means to
expand government control over the private sector, while Democrats are divided, with some legislators favoring the plan while others, who
represent districts that rely heavily on student loan providers for employment, are siding with private lenders.
Allen Boyd, D–Fla., argues that the president’s proposal could jeopardize thousands of jobs across the country, including 650 in his own
district, at a time when unemployment is already rampant. And the states that administer loans through state-based guarantee agencies,
considered quasi-government entities that benefit the same as private lenders, are fighting to retain their lending business.
To help keep these quasi-government agencies afloat if they lose their FFELP business, the Obama administration has proposed spending $500
million a year on these agencies’ financial literacy programs and services.