Nelnet, Sallie Mae-Funded Senators Opposing Student Aid Reforms

The Hill reports that a bipartisan group of senators are grumbling about some of President Obama's proposed reforms to higher education student aid programs. Specifically, they are opposed to Obama's proposal to effectively end the Family Federal Education Loan program and channel all government lending to students through the Direct Loan program.

If you are unfamiliar with the FFEL and Direct Loan programs, the difference is fairly simple. FFEL is basically a government subsidy to the private loan industry, while the Direct Loan programs provide the same service to students at a lower cost to the taxpayers. As an excellent primer from the Center for American Progress explains:

FFEL is a no-lose proposition for private lenders. The government guarantees repayment in the case of default and a predetermined profit margin, paying a subsidy if the student interest rate falls below a set level. Therefore, it is not surprising that the largest private lender in FFEL – Sallie Mae – is also one of the most profitable companies in the country. In fact, Sallie Mae was recently identified as the second most profitable company in the United States with over 36 percent return on revenues – compared to a median return of 4.6 percent for the nation's 500 biggest companies.

Direct Loans are a better deal for the taxpayers. First, they ensure that the interest is returned to the Treasury, rather than subsidizing banks working as middlemen. Second, they provide the necessary capital at a lower cost. When a bank makes a student loan, it borrows money on the open market and then lends it out to the customer. The federal government does the same thing. But the government's cost of borrowing is much lower than a bank's, because the government borrows against U.S. Treasury bills backed by the "full faith and credit" of the United States. Former Bush Council of Economic Advisors Chief Lawrence Lindsey made this point in 1995, stating that "taxpayer cost is less for direct lending largely because the government can obtain capital less expensively through the sale of government securities than the market rates it must pay to support a system of loan guarantees."

The FFEL and Direct Loan systems deliver the same loans at the same interest rates to students, and colleges choose in which program to participate. But every time a school opts for FFEL, the taxpayer loses because the costs to the government far exceed the costs of Direct Loans.

So who are these Senators that oppose Obama's shift from the FFEL to the Direct Loan program? Mostly they are recipients of large campaign contributions from the two largest private student lending corporations: Sallie Mae and Nelnet.

From The Hill:

Rep. Buck McKeon (Calif.), the top Republican on the House Education and Labor Committee, received $20,000 in donations from private lenders Sallie Mae and Nelnet, the most of any lawmaker during the last campaign cycle.

McKeon argues Obama’s proposal is a “government takeover” of the $85 billion student aid industry that would only grow the country’s budget deficit. The Republican has supported private lending firms because they have provided students with more choices and serve as a “critical backstop” for the public lending program, said Alexa Marrero, spokeswoman for Republicans on the House Education and Labor Committee. [...]

While the Obama administration expects that the shift from subsidized private loans to direct federal lending would save taxpayers $4 billion a year, McKeon has derided the plan as a “government takeover” that would add to the federal deficit and limit students’ choices.

You have to love conservatives. They're all for free and unfettered markets, supposedly because they are more efficient than government programs and because they are opposed to wasteful spending. Unless, of course, it endangers the business model of their supporters.

Let's be clear as to what's happening here. The Obama administration isn't trying to shut down or "take over" private lending, and they're not proposing some wildly inefficient, Rube Goldbergesque government program take the place of private lenders. What they're proposing is that the government stop paying an unnecessary and needlessly expensive subsidy to the private lending industry, and direct those savings towards the more efficient Direct Loan Program. And let's be clear, the Direct Loan Program is a far more efficient use of resources. From the CAP report:

Based on data provided in a 1999 U.S. Department of Education report on the administrative costs of each student loan program and the "subsidy" costs associated with each loan program contained in the Administration's budget for fiscal year 2005, we can estimate that direct loans cost the government approximately 69 cents per every $100 loaned or less than one penny per dollar loaned. In contrast, FFEL loans cost the government $10.51 for every $100 borrowed or a little more than 10 cents on the dollar. So the savings affiliated with opting for a Direct Loan rather than a FFEL loan are approximately $9.82 ($10.51 - $0.69) per $100 borrowed, or more than 9 cents on the dollar.

So Obama's plan will continue to provide much needed financial aid to students, but at far less cost to the American taxpayer. That's what we're talking about here, and that's what the Senators from Sallie Mae and Nelnet oppose. Fortunately it looks like they don't have too many votes on their side, and a procedural move by Steny Hoyer may make any opposition to the changes futile at best:

Though Hoyer hasn’t weighed in on the proposal, one of his aides told reporters last week that student loan reform could be attached to a budget reconciliation bill, a move that would make it easier to get through the Senate. Reconciliation measures can’t be filibustered and require only a simple majority to pass in the upper chamber. Since Obama announced his budget plan last month, a key centrist Democrat, Sen. Ben Nelson (Neb.), and several senators in the GOP leadership, including Lamar Alexander (Tenn.) and John Cornyn (Texas), have come out against the proposal for more direct government lending.

Let's hope that Hoyer, who is also a large recipient of Sallie Mae contributions, makes the right decision here and comes out in support of the bill. If not, I don't expect that Sallie Mae and Nelnet are going to take this lying down. If it gets to that, we might actually have a fight on our hands.