On Loan Plan, Think Twice

Not long ago, one of the authors of a recent Inside Higher Ed Views article, “Aid for Students, Not for Banks,” proposed the creation of “State/Federal Partnerships for College Access and Completion Rates,” arguing that there are “too few programs addressing” these issues.

If the Obama administration’s budget proposal to eliminate the Federal Family Education Loan Program succeeds, there’ll be even fewer. That the author of is unaware of the extraordinary work done by guaranty agencies and lenders in the areas of college awareness and access speaks volumes of the quality of the debate around the administration’s proposal – and the need for more careful examination.

Clearly, battle lines have been drawn. Advocates for the proposal have quite effectively stoked populist rage against the organizations that make and service student loans. But just as any fair-minded person should be wary of claims that are “too good to be true,” they should be equally wary of charges that are “too bad to be true.” It should count for something that the picture being painted is unrecognizable to the overwhelming majority of the nation’s financial aid administrators and student loan borrowers.

In fact, more than 1,560 financial aid professionals have signed an independent, online petition opposing the Administration’s proposal.

Finally, does anyone seriously think the lives of borrowers will improve with the government not only becoming the (only) banker, but also needing to make large profits on loans in order to fund the proposed Pell Grant expansion?

As Congress moves forward with abbreviated consideration of the proposal under budget reconciliation, the student loan community implores policymakers to weigh two questions:

Are the projected cost savings from eliminating FFELP real? The short answer is No.

The Office of Management and Budget claims that the proposal will save $46 billion over 10 years; the Congressional Budget Office, $94 billion.

That the government’s budget agencies produced such divergent estimates ought to be reason enough for healthy skepticism.

But real grounds for skepticism exist. This year OMB revised its cost estimate of about 10 years' worth of FFELP loans. It said it was $18 billion too high. Since 2004 FFELP’s costs have been chopped by $23 billion.

Did the Direct Loan program get cheaper? Nope. OMB has revised its cost estimates upward by $12 billion. That amounts to a $30 billion swing.

In other words, the cost savings projected could very well vanish. Congress could wind up eliminating the more cost effective program.

Finally, the government’s cost estimates are problematic in other ways. For example, the department’s growing costs for administering direct loans would not be counted. These and other flaws have been well documented by the CBO, OMB, Congressional Research Service, and PricewaterhouseCoopers, among others.

Healthy skepticism is warranted for another reason. “Subsidy costs are estimates about an uncertain future and could be manipulated,” a 2004 OMB memo explained. “There is pressure on occasion to manipulate the estimates.”

Apart from whether the savings are real is what they actually represent: The government profiting on its low, low borrowing costs (close to 0 percent), while the borrower rate is as high as 6.8 percent.

The second question that should be weighed is, “Are there elements of today’s FFELP that are worth preserving?”

One of its greatest strengths is its accessibility: wherever Americans with dreams of going to college live, whether it’s on the plains of Nebraska, in the mountains of West Virginia or on the bayous of Louisiana, there’s almost always a nearby lender, bank or credit union that makes federal student loans.

And, almost always, the guaranty agency that serves the community sponsors college nights and other college awareness programs, as well as financial aid workshops. These programs have helped countless numbers of low-income and first-generation college students.

Another strength is the program’s default prevention activities, which have given FFELP lower lifetime default rates. Beyond the numbers is the personal aspect: the thousands of men and women who work for guaranty agencies really care about doing a good job -- and that job is to help borrowers manage repayment and avoid default.

A third strength is the program’s continuous innovation. Lenders have invested millions of dollars in developing more convenient processes, such as eSignature, and improving customer service. Consider this: almost every major processes and convenience used by the Direct Loan program was invented by FFELP’s private sector participants.

Finally, FFELP has to be one of the government’s most small “d” democratic programs. Not only do schools get to choose which program to participate in, students get to choose their lenders. With respect to schools, they’ve always preferred FFELP by overwhelming majorities – even today after years of budget cuts and during the current credit crisis.

The administration’s proposal is not a win-win for college access. There will be losers. College awareness and default prevention services will vanish. It will cost jobs and eliminate choice and competition. It will add a trillion dollars to the national debt within a dozen years.

This is no ordinary “budget” proposal. It will affect the “going to college” process for families for years to come. Even though it’s on a legislative fast track, it’s not too late for Congress to slow this train down. As is being done with health reform, all the stakeholders should be convened to explore ways to preserve the best of the current system and build a better one for the future.