Student Loan Blog : Sallie Mae, FFEL program

Overhaul of Student Loan System in the Works

Student Loan Girl — Mon, 22 Jun 2009 15:30:00 GMT

A bill to overhaul the student loan industry may reach Congress as early as next week; education-committee chairs are working behind the scenes on a piece of legislation that would eliminate the third-party student loan system called the Federal Family Education Loan Program, The Chronicle of Higher Education reports (“Behind the Scenes, a Student-Loan Overhaul Takes Shape,” June 16, 2009).

Although few details have been released about the proposed legislation, lenders and a large number of Congressmen are hoping the FFEL program won’t end up on the chopping block like President Obama has proposed. Already as many as 13 counterproposals to the elimination of FFELP have begun circulating Congress, including a detailed plan from lending giant Sallie Mae.

It’s not likely, however, that the FFEL program will survive this legislative session, some Congressmen say, considering taxpayers could see as much as $94 billion in savings over the next 10 years if FFELP were eliminated, according to estimates from the Congressional Budget Office.

Obama had originally suggested that these savings, which have been readjusted down to $87 billion, could be used to increase Pell Grants award amounts each year at a rate equal to the Consumer Price Index. It now looks like Congress will, instead, propose that the money be infused into the Pell Grant program to allow appropriators to “continue to set the maximum [Pell Grant] award” so as not to end up capping the maximum award amount.

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The Plot Thickens for the Future of Student Lending

Student Loan Girl — Tue, 14 Apr 2009 00:00:00 GMT

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.

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More Schools Offering Direct Student Loans

Student Loan Girl — Fri, 13 Mar 2009 21:25:00 GMT

The direct student loan program — which President Obama wants to establish as the sole provider of federal student loans by 2010 — is swiftly gaining ground on the Federal Family Education Loan Program.

In the past year, the number of college and universities originating loans through the Direct Loan Program has increased by more than 50 percent, reports USA Today (“Government’s Direct Student Loan Program Gets a Boost,” March 10, 2009). More than 1,600 schools are offering direct loans, up from 548 schools in 2007, according to the Department of Education, while the number of schools offering FFELP loans fell by 3.6 percent during the same time period.

Currently, students are able to get federal student loans from one of two government programs: the Federal Family Education Loan Program, through which students borrow money from private third- party lenders that are subsidized by the government, or the Direct Loan Program, through which families borrow money directly from the Department of Education.

Direct Loan Program: The Future of Federal Student Loans

However, President Obama recently announced a plan that would eliminate the proven 44-year-old FFEL program, which is responsible for making three out of every four federal student loans. The move would transform the Direct Loan Program from a minority player in the student loan industry to the nation’s only originator of federal student loans.

The president’s plan could reduce the government’s student loan costs and save the government $4 billion, Obama administration officials suggest.

Critics of the president’s proposal — which include private student loan lenders — contest the government’s $4 billion savings estimate and fear that the Department of Education won’t be able to handle the surge in loan volume that would occur if the Direct Lending Program became the only originator of federal student loans. Families could be forced to endure poor customer service from an overburdened system, and could encounter difficulties in getting the funds they need for school, critics say.

Besides excellent customer service and a long-running track record of success, private lenders have another advantage over direct lending, says Barry Feierstein, executive vice president of Sallie Mae.

“Private lender and loan guarantors have a system to help borrowers avoid defaulting on their loans,” he says. “That level of outreach doesn't exist in the federal direct loan program.”

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