Surviving the Game of Chicken

WASHINGTON -- Financial aid officers and their bosses, college presidents, can be forgiven if they feel a little bit like the rope in a game of political tug of war over federal student loans.

On the one hand, they're hearing regularly from the Obama administration and its allies in Congress that they're putting their students' academic futures at risk if they don't prepare to switch to the federal Direct Loan Program now, because pending legislation known as the Student Aid and Fiscal Responsibility Act will require them to do so by next July.

On the other, lenders are whispering in their ears that the legislation's fate is uncertain and that if they prefer the bank-based Federal Family Education Loan Program, in which a majority of colleges still participate, they should stick to their guns. And Republican supporters of the FFEL program introduced legislation last week that would extend the 2008 law, known as the Ensuring Continued Access to Student Loans Act (ECASLA), that provided federal money to buttress the lender-based program as the financial markets collapsed around it.

The problem is that both sets of messengers have political motives in sending those signals, and while many financial aid officers have long held their own opinions about which of the two loan programs they prefer, most of them are setting those aside at the moment.

They're focused instead on the nuts-and-bolts questions they face: If we don't switch to direct lending now, will we truly be putting our students at risk? Can we take partial steps without making the significant investment of time, energy and possibly money that a full-blown shift might require? How long can we wait? How much of a gamble is it not to switch to direct lending now?

From a practical standpoint, putting the political rhetoric aside: What's an aid administrator or college president to do?

Given the self-interested messages coming out of the capital and from loan company officers, the confusion is understandable. For months, the Obama administration and Democratic leaders in Congress have been aggressively advocating for President Obama's proposal to stop making loans through the lender-based FFEL program and to shift all lending to the government's Direct Loan Program.

An air of inevitability has surrounded the Obama plan, in large part because the administration has built backing for the move by proposing to use tens of billions of dollars from the shift to support a range of highly popular purposes: increasing the maximum Pell Grant, buttressing community colleges, investing in early childhood education. The House of Representatives passed legislation in September to carry out the Obama plan, and administration officials and Democratic leaders in the Senate have continually expressed confidence that the Senate will do the same.

But the question of when has begun to be a factor, with health care completely dominating the Congressional agenda, and likely to do so until that legislation is resolved.

As administration officials and, last week, Congressional Democrats sent letters to college presidents essentially telling them that they’d be irresponsible not to get their institutions at least ready to switch to direct lending, many financial aid officers have increasingly bristled about being told to significantly alter their operations in response to a set of requirements in a law that might, eventually, pass Congress.

Some of that unhappiness is no doubt philosophical; many financial aid administrators have been in the lender-based program for decades, have no desire to switch, and believe that the Obama administration is pushing the elimination of the FFEL program mostly because it dislikes the lending industry.

Others continue to believe that competition between two programs is good and worry about the fragility of a system in which all student loans are made through one government-run program, and what might happen if technological or other problems arise.

But at this point, the “political venom” that has marked the debate over student loans has largely faded among financial aid directors themselves, says Justin Draeger, vice president of public policy and advocacy at the National Association of Student Financial Aid Administrators.

In its place -- particularly at colleges that are leery of the switch because they have home-grown technology systems that may require major overhauls or because they have few employees -- is concern about what it means to be “direct loan ready” and how many steps in that direction they can take, or put off until there is no alternative, without putting their students’ loans at risk.

“I’ve got a big folder on my desk that says ‘DL transition,’ but for most of us with small staffs -- we’ve got three people -- there’s no good time in the short term to make a move like this,” says Dave Cecil, director of financial aid at Kentucky’s Transylvania University. “We’re going to have to get help from IT and other people on our campus, and a lot of schools like us don’t want to go down that road until we absolutely have to.”

Reading the tea leaves from Washington is a challenge for aid administrators like Cecil. The letters sent by the Obama administration and Congressional Democrats talk about getting “direct loan ready,” and when Education Department officials used that term at last summer’s NASFAA meeting, they referred to taking a small number of administrative steps needed to have the authority and ability to disburse direct loans.

Those steps -- altering legal agreements with the department, getting passwords to use its disbursement system -- were described as a three- or four-day process equivalent to “flipping a switch.”

But when House Democrats wrote last week that institutions should be sure that they are “prepared to … deploy the Direct Loan program for the 2010-2011 academic year,” that arguably means something quite different.

Eileen O’Leary, financial aid director at Stonehill College and a leader in the Direct Loan Coalition, acknowledges that it is a “bigger deal” to “get your campus ready to process student loans through the department’s origination system” for direct lending. At some campuses, it will mean putting in place just a new module of a proprietary system like Banner; at institutions with legacy or home-grown technologies, it could require a much more extensive overhaul that could be months in the making.

Either way, “there’s going to be a learning curve,” with meaningful “time and energy you have to expend,” O’Leary says.

A survey completed by NASFAA this summer found that most colleges that had already made the transition to direct lending had done so within four months, and that most found it to be easier, and ultimately less burdensome, than they had expected.

Colleges are understandably reluctant to expend the significant time, energy and money required to get “ready” to shift to direct lending without making the full switch, Draeger says. But while it’s unsurprising that direct loan advocates like O’Leary believe the “smart thing to do” now is to “just move to direct lending,” a consensus is growing even among more agnostic parties that the “smart bet” for institutions is to get fully ready for direct lending.

NASFAA has urged its members in writing to “prepare today -- even if it may not ultimately be needed -- to make loans through the Direct Loan program.” And Mark Kantrowitz, publisher of Finaid.org, similarly wrote to financial aid officers Friday that “[i]t would be a wise precaution for all colleges to prepare now for the possible need to originate loans in the Direct Loan program.”

Why does a growing chorus of financial aid experts – even though who don’t necessarily endorse the administration’s plan to end lender-based student loans -- seem to see increased likelihood that 100 percent direct lending is in the offing?

Kantrowitz describes it this way. Congress made clear when it passed the 2008 ECASLA law that it was a temporary stopgap measure to buttress the lender-based FFEL program, and lawmakers have made clear that they have no intention of extending the stopgap law beyond September. Because the financial markets have not recovered meaningfully, Kantrowitz says, “there will be insufficient lending capacity without ECASLA to sustain [FFEL] as a viable source of funding.”

So even if advocates for the lender-based program are right and Congress does not pass the Democrat-sponsored student loan legislation in the coming months, the lender-based program will not be a viable option for colleges and students only if Congress does act to extend ECASLA. “The status quo, if Congress does nothing, is that the direct loan program is going to be dominant loan program,” Kantrowitz says. In other words, the FFEL program exists only because of ECASLA, and there will be virtually no lender-based program if ECASLA is not extended.

Like many financial aid directors, Transylvania’s Cecil says he has a hard time envisioning the Education Department and its Democratic allies in Congress, if they fail to pass the student loan changes they favor, refusing to extend ECASLA and appearing to put the colleges that have remained in FFEL, and their students, at risk. “Does Congress want to be made the bad person?” he asks.

NASFAA has repeatedly encouraged Congress to extend ECASLA to give institutions that cannot make the transition to direct lending by July 1 time to do so. But with lawmakers apparently unwilling to sustain what was always intended to be a temporary fix, says Draeger, the reality is that those who continue to favor the lender-based loan program are increasingly up against not just a powerful set of political forces, but the reality of the economic situation.

“I totally understand why schools don't want to feel pressured to do something that hasn't legislatively passed yet,” he says. “But you also have to look at the market forces. We’ve had a government prop-up [for the FFEL program], and that prop-up may not exist” after next summer. “At a certain point, it stops being a policy position, and starts being practical.”