Republican Shenanigans Around Student Lending Reform

A new press release from Rep. George Miller's office calls shenanigans on Republicans for attempting to cook the books on student loan reform. The amazing thing of it is, even taking their concerns seriously, the CBO still says that ending the FFEL for the government Direct Lending program is going to save almost $90 billion that can be reinvested in real tuition help for students. The result? These lending reforms look more attractive than ever, and Republicans, by defending a bloated give-away to lending corporations, just lost even more credibility on issues of fiscal responsibility.

You can read more on this directly from the CBO at the Director's Blog.

WASHINGTON, D.C. – Today, in a desperate attempt to confuse the American people about a landmark bill to make college more affordable and reduce the deficit, Republican lawmakers deliberately asked the Congressional Budget Office to ignore current student loan market conditions and standard scoring methods. Republicans in the House and Senate released a manipulated analysis they requested from CBO that uses a methodology preferred by banks, and does not take into account the changed landscape of the student loan market, under which the federal government now finances 60 percent of all federal student loan activity.

The analysis does not change the official score of the bill, the Student Aid and Fiscal Responsibility Act of 2009, which estimates that it will save $87 billion over 10 years, or the fact that it is fiscally responsible. All of those savings will be invested in additional aid to help student and families pay for college, to improve early learning opportunities for young children, and to pay down the deficit.

“It’s clear that Republicans didn’t like the truth – that our legislation generates almost $90 billion that could be used to help students, families, and taxpayers – so they shamelessly decided to have a little fun with the numbers,” said U.S. Rep. George Miller (D-CA), the chairman of the House Education and Labor Committee and the author of the legislation. “This is nothing more than a desperate attempt to confuse the public and manipulate a clear determination by CBO that switching to the Direct Loan program is the most sound, fiscally responsible policy decision we could make for families and taxpayers. This is yet another predictable political gimmick from a party that is proving that they will do or say anything – no matter how misleading – to block reforms that will make a tremendous difference in improving the lives of America’s families.”

BACKGROUND

There are several factors to keep in mind when reporting on this estimate:

CBO’s official estimate still projects that the Student Aid and Fiscal Responsibility will save $87 billion over 10 years. This alternative estimate does not change the savings the bill will generate, or how those savings will be spent, in any way.

This alternative estimate ignores current student loan market conditions, under which the federal government is currently supporting 60 percent of all federal student lending. This estimate assumes normal credit market conditions, under which the federally guaranteed student loan program functions entirely independently, as it used to. It does not reflect today’s reality: that the federally-guaranteed student loan program is on life support. The federal government, through both the Ensuring Continued Access to Student Loans Act, and the Direct Loan program, is now financing 60 percent of all federal student loan activity. This current ECASLA-supported, federally-guaranteed student loan program is very similar to the DL program – it generates the same cash outflow upfront, but the funds are sent to lenders who then give it to borrowers. If this alternative estimate was based on this current reality, it would likely show a higher market-risk adjusted subsidy rate for the Federal Family Education Loan Program – again reflecting that the program is on life support.

The letter highlights the difference between the streamlined payment structure of DL and the complicated payment structure of FFEL: “In the direct student loan program, the federal government makes a large, one-time outlay for the amount of the loan (net of various fees) and then receives a stream of principal and interest payments over time. In the guaranteed student loan program, the federal government faces a far more complicated set of payments. It does not disburse a principal amount (loans are disbursed by private lenders) but instead receives some up-front fees, makes a stream of subsidy payments (known as special allowance payments) to lenders, partially compensates lenders for loans that go into default and pays certain borrower benefits, in addition to various other receipts and payments.” Again, this does not reflect the additional risk that the federal government currently takes on under the ECASLA program.

Even when using this alternative methodology that lenders and critics of H.R. 3221 favor, this estimate still reinforces that Direct Loans save more money than FFEL loans. “CBO estimates that over the 2010-2019 period, the subsidy cost for each dollar of a guaranteed loan will exceed the subsidy cost for each dollar of a direct loan by between 10 and 20 cents. Generally, in CBO’s estimation, the direct loan program will have a negative subsidy rate (that is the net receipts to the government on a present-value basis are projected to be greater than its disbursements), whereas the guaranteed loan program will have a positive subsidy rate (that is a net cost on a present value basis).”

Even CBO acknowledges concerns with using this alternative estimate; it leaves many questions unanswered about how future credit market turmoil could impact the student loan programs. “The approach does raise some concerns. As the recent financial turmoil has shown risky assets, including student loans, can fluctuate wildly in value. Those fluctuations can lead to large changes in market-based estimates of subsidy rates for student loans from one year to the next.”