FFEL

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.”

One of the major reasons we've had the government-subsidized, Family Federal Education Loan program for so long is that the corporations who benefit from the program spend a lot of money lobbying higher education institutions to keep or adopt the program. Once a school is in the program, it's kind of hard to get them out. Administrators get taken out on corporate junkets every year, and what administration would want the headache and red tape of switching over to another program?

Turns out, the transition process is pretty painless. Over at the Student Lending Analytics blog, they are reporting on a new survey by the National Association of Student Financial Aid Administrators indicates that the transition process is pretty smooth. This is good news as it will likely mean less resistance from colleges who take part in the FFEL program (a majority, I think, but don't quote me).

• Ease of implementation: 73% of the institutions that have switched from FFEL to DL in the last year said the switch to Direct Lending was easier than they thought
• 4% said it was more difficult
• Resources to assist in implementation: 84% said the Department of Education was helpful in providing assistance for the conversion and 88% said other schools were also helpful
• Administration of DL program: 61% said the burden of administering the DL program was less than the FFELP program; 24% said it was the same; 14% said it was greater.
• Staffing requirements of Direct Lending: 84% said they neither had to increase nor decrease the number of staff to administer the DL program.
• Greatest difficulty: Working with software developers and in-house IT staff
• 10% said software developers were unhelpful
• Time to convert: 80% able to convert within four months
• 14% indicted that it took longer than seven months

There are a few caveats about the sample size, diversity, and response rate in this survey. So take them with some grains of salt, but overall very good news.

Great news coming out of the Education and Labor Committee today. Chairman Miller has introduced legislation that will make student lending more efficient by ending the FFEL (government subsidized corporate lending) program, and redirect money to the more efficient Direct Loan program and Pell Grants. This will mean billions of more dollars in aid to students at no cost to the government.

Chairman Miller Introduces Legislation to Make Landmark Investments in College Affordability

Legislation will invest billions of dollars in student aid by embracing President Obama’s proposal to switch to Direct Loans

WASHINGTON, D.C. – U.S. Rep. George Miller (D-CA), the chairman of the House Education and Labor Committee, today introduced legislation that will make college dramatically more affordable by investing billions of dollars in additional student aid – and at no new cost to taxpayers.

The legislation, the Student Aid and Fiscal Responsibility Act of 2009, will generate almost $100 billion in savings over the next ten years that will be used to boost Pell Grant scholarships, keep interest rates on federal loans affordable, create a more reliable and effective financial aid system for families, and enact President Obama’s key education priorities.

“As President Obama has made clear, we have a rare opportunity to make a landmark investment in America’s economic future by making common-sense changes to the way our student loan programs operate,” said Miller. “Students and families need stronger, reliable college aid, our economy needs a highly-skilled, educated workforce, and our taxpayers need policies that make the best use of their dollars. This legislation will help us reach all of these goals by transforming our financial aid system from one that puts banks before students into one that makes paying for college a better deal for families and taxpayers.”

Similar to what President Obama proposed in his FY 2010 budget, the bill will originate all new federal student loans through the Direct Loan program starting in 2010, instead of through lenders subsidized by taxpayers in the federally-guaranteed student loan program. Unlike the lender-based program, the Direct Loan program is entirely insulated from market swings and can therefore guarantee students access to affordable college loans, at the same low interest rates, terms and conditions, no matter what happens in the economy.

The legislation will ensure that all federal student loan borrowers receive the best possible customer service when repaying their loans by forging a new public-private partnership that allows private lenders to compete for contracts to service loans. Additionally, it will ensure that non-profit lenders have the opportunity to continue servicing loans – preserving a role for lenders and maintaining jobs in communities throughout the country.

According to estimates from the Congressional Budget Office, the legislation will generate $87 billion in savings over the next 10 years. The legislation would invest those savings directly in students and families by:

• Investing $40 billion to increase the maximum annual Pell Grant scholarship to $5,550 in 2010 and to $6,900 by 2019. Starting in 2010, the scholarship will be linked to match rising costs-of-living by indexing it to the Consumer Price Index plus 1 percent;
• Investing $3 billion to bolster college access and completion support programs for student;
• Strengthening the Perkins Loan program, a campus-based program that provides low-cost federal loans to students;
• Keeping interest rates low on need-based – or subsidized – federal student loans by making the interest rates on these loans variable beginning in 2012. These interest rates are currently set to jump from 3.4 percent to 6.8 percent in 2012;
• Making it easier for families to apply for financial aid by simplifying the FAFSA form;
• Investing $1.2 billion in Historically Black Colleges and Universities and Minority-Serving Institutions to provide students with the support they need to stay in school and graduate; and more.

In addition, the Student Aid and Fiscal Responsibility Act will direct $10 billion of these savings back to the U.S. Treasury to help pay down the deficit. It will also invest in early education opportunities and in school modernization projects that will help the nation transition to a clean energy economy.

To view a summary of the legislation, click here (pdf).

For more details on:

• How this legislation will help students and families, click here (pdf).
• For more details on covering to Direct Loans, click here(pdf).
• For more details on how this bill will strengthen community colleges, click here(pdf).
• For more details on investments in early education, click here(pdf).
• To view a myth versus fact sheet on this legislation, click here.

The House Education and Labor Committee has been examining various proposals for student loan reform and seeking feedback from all key stakeholders over the past few months. In May, the Committee held a hearing to examine these proposals, at which the Obama administration, lenders and colleges and universities testified. For more information on that hearing, click here.

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A number of youth groups have already issued statements lauding the committee's actions.

US PIRG:

NEW BILL MAKES HISTORIC INVESTMENT IN STUDENT AID

U.S. Public Interest Research Group Commends Chairman Miller

WASHINGTON, July 15 – Christine Lindstrom, U.S. Public Interest Research Group Higher Education Program Director, released the following statement on the higher education bill introduced on Wednesday by George Miller (D-CA), chair of the U.S. House Education and Labor committee:

“U.S. PIRG commends Chairman Miller (D-CA) for introducing a game-changing proposal that enlarges the impact of student aid programs for the tens of millions of students and families who rely on grants, loans, and access to community college to attain a college education.

“In keeping with the higher education budget proposal that President Barack Obama released in February, the policy makes the single biggest investment in student aid in history. It reforms the Federal Pell Grant program to increase each year along with the cost of living, cuts the interest rate on subsidized Stafford loans, infuses our nation’s community college system with more funding and support, and makes the student aid programs more efficient for students and taxpayers.

‘We urge the House Education and Labor committee and Congress to pass this historic legislation.”

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Campus Progress

Miller Introduces Legislation that puts Students Over Banks

Campus Progress Statement on the Student Aid and Fiscal Responsibility Act

Washington, DC -- This morning, Rep. George Miller (CA), Chairman of the House Committee on Education and Labor, introduced the Student Aid and Fiscal Responsibility Act, which will eliminate wasteful subsidies to student loan companies and use the $87 billion in savings on a bold policy package to make college more affordable and accessible for low and middle income families. The legislation closely follows a proposal by President Obama, despite fierce opposition from the student loan industry, and represents the largest ever investment in higher education.

Campus Progress has launched a new campaign Students Over Banks (studentsoverbanks.org) to support passage of this legislation. In addition to providing young people information about the proposals, the website offers profiles of some of the worst actors in the Federal Family Education Loan Program (FFELP), ways to take action online, and the latest news on college affordability issues.

Last week, as part of the 2009 Campus Progress National Conference, Campus Progress also partnered with USPIRG and other groups to bring one hundred people to the Capitol to meet with lawmakers on this and other economic issues affecting young people. We believe that the choice is clear: We can either increase opportunities for young people and displaced workers and build the American workforce for a 21st century economy, or we can cater to special interests trying to hold on to wasteful federal subsidies. Campus Progress commends Chairman Miller and other lawmakers who are standing against special interests in order to expand educational opportunity.

The Student Aid and Fiscal Responsibility Act would:

• Invest $40 billion to increase the maximum Pell grant award to $5,550 by 2010, and $6,900 by 2019. It will also pave the way to tie the maximum award level to inflation plus 1%.
• Invest in community colleges and historically black colleges and universities, as well as efforts to improve college access and completion rates.
• Strengthen the Perkins loan program to help students avoid risky private loans.
• Simplify the FASFA.
• Provide $10 billion in deficit reduction.
• Originate all future loans through the Direct Loan program, which will create $87 billion in savings over ten years.

Campus Progress is the youth division of the Center for American Progress, a nonpartisan, nonprofit progressive organization. Through programs in activism, journalism, and events, Campus Progress helps young people make their voices heard now on issues that matter, and works with young leaders and organizations nationwide to build a strong, united progressive movement that can bring long-term positive change. Campus Progress runs a daily web magazine, CampusProgress.org; supports student publications on 50 campuses; supports local and national youth issue campaigns; and has held over 700 events and film screenings. For more information, please visit Campusprogress.org.

Just the Facts:

• The top 20 FFELP loan holders in 2008 spent at least $4,665,000 on lobbying since January to win favor in Congress, sometimes while receiving bail-outs from taxpayers, according to figures from Opensecrets.org
• Loan Giant Sallie Mae has spent $1,150,000.
• Around 260,000 additional students would receive Pell Grants for the 2010-11 school year if Obama’s plan is enacted, according to US PIRG and the Institute for America’s Future
• An interactive map with a state-by-state breakdown is available at: http://www.campusprogress.org/cribsheets/3943/pell-grant-changes
• The Pell grant, which helps low and middle income families, covered 72% of the average cost of attendance for a public four year college in 1976, but only 33% of this cost in 2006.
• Loan Companies offered at least 13 counter-proposals designed to preserve their profits at the expense of low and middle income students
• Most of these plans aimed to preserve some part of the FFELP program in order to preserve the profits of the particular company or sector of the student loan industry making the proposal.
• In a last ditch effort, most of the lending community united around a single “Frankenstein” counter-proposal. Despite claims by lenders that it would create “similar” budget savings lawmakers believe that these proposals would take $15 billion that could be spent on expanding educational opportunity and redirect it toward banks.
• The Lumina Foundation estimates that the American Economy will face a shortage of 16 million college educated workers by 2025. Yet we are leaving too many talented young people behind, especially those from low-income or minority families.
• The most academically prepared low-income high school graduates go to school at about the same rate as the least prepared students from wealthy families.
• For young people that do attend college, large class and racial disparities exist in completion rates. Almost 67% of non-Hispanic White students earn a bachelor’s degree from any school within six years, while the same can be said for only 45.7% of non-Hispanic Black students.

My computer seems to be cooperating once more. Let's hope it holds up. Here's a quick dump of all the tabs that have collected in my browser since I left for Berkeley (the panel was great, btw - you can read a rundown here. We will have video in a week or two):

• In Newsweek, Ben Adler looks at Obama's first 100 days and finds that the President has kept many promises to young voters.
• At Tech President, Micah Sifry posts Putting Citizens First - a white paper on transforming online government.
• Over at Tech Pres sister blog PDF, Sifry has an interview with Vivek Kundra and Macon Phillips on changing online government.
• Steven Benen says that the Obama Admin wants to accomplish student lending reform via the reconciliation process.
• Matt Bai doesn't understand the value of Twitter.
• Jose Antonio Vargas writes at The Washington Post that the online lessons - and staffers - of the Obama campaign are creeping into some of this year's down-ballot campaigns.
• Nancy Scola notes that the White House videos are starting to attract more eyeballs.
• NTEN has a new report on how nonprofits are using social media.

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.