Submitted by J. Timmons (not verified) on July 21, 2008 - 2:58pm.
Consider the “politics” that prompted NAF to remove the following quote and other information from its Web site only days after the latest President’s budget was released showing that FFELP is cheaper than Direct Loans on a subsidy rate basis.
“Budget experts agree that the most appropriate way to assess the cost of a loan commitment -- whether a guarantee or a direct loan -- is to use ‘present value’ or ‘subsidy rate’ accounting. The Government Accountability Office (GAO) says that this approach ‘puts direct loans and loan guarantees on an equal footing.’ According to the White House Office of Management and Budget (OMB), this cost estimation process ‘takes the best information available at a given point in time to measure the budget impact of Federal loan programs. It uses the actual historical cash transactions of loan programs to compare the net present value of payments and receipts.”
Now NAF and other DL advocates argue that Direct Loan Consolidation Loans should be treated separately when computing overall program costs.
There’s no better example of politically-driven policy than the Direct Loan Consolidation Program. Politicians have used the Direct Loan Consolidation Program to provide exclusive and specific features to attract recent graduates. For many years, the Direct Loan Consolidation Program has been used opportunistically to grow Direct Loan volume (primarily because 80% of schools remained committed to FFELP). For example, Income Contingent Repayment (ICR), which is only available in Direct Loans, was heavily promoted as a means to allow people to pick low-paying careers like teaching.
The recently approved College Cost Reduction and Access Act extends public service loan forgiveness to Direct Loan borrowers only. The only way for 80 percent of student loan borrowers to take advantage of the program is if they consolidate their FFELP loans into the Direct Loan Consolidation Loan Program.
There are other examples of how the loan consolidation program has been used to grow the Direct Loan program.
Loan rehabilitation is one of the most effective ways to resolve loan default. Rehabilitation, however, requires 9 consecutive monthly payments and is not an option for many borrowers in default because many cannot afford a single full payment.
One of the next best options for a borrower in default is loan consolidation. But in FFELP a borrower must make 3 consecutive payments before being eligible for a FFELP Consolidation Loan. This exact same borrower, however, is not required to make a single payment to be eligible to consolidate into the Direct Loan program. Often, this means that the BEST option for defaulted borrowers is to consolidate into the Direct Loan program (which interestingly is labeled as “dumping” bad loans into the program).
NAF and other “budget experts” including GAO said OMB subsidy rates are the best indicator of program costs. But now that the political goals of Direct Loan advocates have been accomplished through using the Direct Loan Consolidation Program as a key feature in growing loan volume in the program, they want to run away from the numbers.
The reason: it’s only going to get worse. Direct Loan costs are going to explode in the coming years as volume increases and the makeup of the colleges in the program changes dramatically. On top of it all, nearly every federal consolidation loan this year is going to be made in the Direct Loan program as lenders have been forced out of the program due to extreme subsidy cuts.
One has to ask: what pages on the NAF Web site will quickly be altered when Direct Loan Consolidation costs continue to rise?
And what excuses will be made by the Direct Loan advocates?
What in Washington isn’t politically driven?
Consider the “politics” that prompted NAF to remove the following quote and other information from its Web site only days after the latest President’s budget was released showing that FFELP is cheaper than Direct Loans on a subsidy rate basis.
“Budget experts agree that the most appropriate way to assess the cost of a loan commitment -- whether a guarantee or a direct loan -- is to use ‘present value’ or ‘subsidy rate’ accounting. The Government Accountability Office (GAO) says that this approach ‘puts direct loans and loan guarantees on an equal footing.’ According to the White House Office of Management and Budget (OMB), this cost estimation process ‘takes the best information available at a given point in time to measure the budget impact of Federal loan programs. It uses the actual historical cash transactions of loan programs to compare the net present value of payments and receipts.”
Now NAF and other DL advocates argue that Direct Loan Consolidation Loans should be treated separately when computing overall program costs.
There’s no better example of politically-driven policy than the Direct Loan Consolidation Program. Politicians have used the Direct Loan Consolidation Program to provide exclusive and specific features to attract recent graduates. For many years, the Direct Loan Consolidation Program has been used opportunistically to grow Direct Loan volume (primarily because 80% of schools remained committed to FFELP). For example, Income Contingent Repayment (ICR), which is only available in Direct Loans, was heavily promoted as a means to allow people to pick low-paying careers like teaching.
The recently approved College Cost Reduction and Access Act extends public service loan forgiveness to Direct Loan borrowers only. The only way for 80 percent of student loan borrowers to take advantage of the program is if they consolidate their FFELP loans into the Direct Loan Consolidation Loan Program.
There are other examples of how the loan consolidation program has been used to grow the Direct Loan program.
Loan rehabilitation is one of the most effective ways to resolve loan default. Rehabilitation, however, requires 9 consecutive monthly payments and is not an option for many borrowers in default because many cannot afford a single full payment.
One of the next best options for a borrower in default is loan consolidation. But in FFELP a borrower must make 3 consecutive payments before being eligible for a FFELP Consolidation Loan. This exact same borrower, however, is not required to make a single payment to be eligible to consolidate into the Direct Loan program. Often, this means that the BEST option for defaulted borrowers is to consolidate into the Direct Loan program (which interestingly is labeled as “dumping” bad loans into the program).
NAF and other “budget experts” including GAO said OMB subsidy rates are the best indicator of program costs. But now that the political goals of Direct Loan advocates have been accomplished through using the Direct Loan Consolidation Program as a key feature in growing loan volume in the program, they want to run away from the numbers.
The reason: it’s only going to get worse. Direct Loan costs are going to explode in the coming years as volume increases and the makeup of the colleges in the program changes dramatically. On top of it all, nearly every federal consolidation loan this year is going to be made in the Direct Loan program as lenders have been forced out of the program due to extreme subsidy cuts.
One has to ask: what pages on the NAF Web site will quickly be altered when Direct Loan Consolidation costs continue to rise?
And what excuses will be made by the Direct Loan advocates?