The Battle Ahead

One has but to marvel at the constant hypocrisy on display day in and day out here at the NAF blogs. To petition the government as the scholars at the NAF well know, is a constitutionally-guaranteed right of all citizens. (Even the despised citizens that make up the student-lending community!)

In addition, you'll note that the more the government interjects itself into the daily transactions of its citizens (through such Rube Goldberg-inspired gems as the PLUS auction for instance), the more petitioning of the government by the citizenry becomes an absolute necessity. So please, spare us the faux concern over an untoward outcome--a fair hearing is the last thing this industry is going to get from this Congress and President--you know that.

What happened to capitalism in our country? You know, the principal of a free market where choice is good, where choice drives competition, and competition lowers price while at the same time increases service. Instead, our president is proposing zero choice and government control over a particular lending segment? What's next, all automobiles are manufactured by the government and the price is set by the government so the government can ensure every american has access to an automobile since they had to provide bail-out money to the auto makers? Obama is walking a slippery slope with proposals like this; he's heading in a direction that directly opposes the founding principals of this country.

There have been numerous analysis on the cost of FFEL vs. Direct Loans over the past ten years. Each side has produced evidence that their respective program is cheaper than the other. This usually means they both cost about the same. When the Federal Government reduced subsidies to the lenders last year in an effort to increase free Pell Grant awards, they patted themselves on the back. The reality was that FFEL lenders & guarantors used to discount the default and origination fees to borrowers back when they could afford to do so. They did so because it was what their COMPETITION did to entice borrowers. These discounts saved borrowers hundreds of dollars each year. But, when the Feds reduced the subsidies to the lenders, the lenders could no longer afford to offer these type of discounts. The reduction in subsidies merely shifted the savings from the loan discounts to the Pell grant. Both the loan discounts and the Pell grant increase are free money to the borrowers. It was like robbing Peter to pay Paul.

When you factor in the crippling economy, some lenders inability to fund new loans was caused in part by the Feds reduction of subsidies to the FFEL program. That reduction in subsidies made the profit margin for lenders so slim that it became unprofitable to make students loans except for those lenders who made the hightest volume of student loans. The Feds pointed fingers at the economy as the reason for the possible lack of student loan funding, when they should have been pointing in a mirror.

Yes, many banks have dropped out of the FFEL program. BUT, not one student or their school was unable to attain student loan funding from a FFEL lender this academic year or last.

Oh yes, those greedy, evil bankers are at it again. I'd like to see detail on the resources the administration is spending lobbying Congress on the student loan proposal. I am, quite sure, it dwarfs the loan industry's efforts.

For example, take the president's radio address last Saturday where is lumped student lenders in with the oil industry. That speech was covered in every newspaper, many tv/radio stations, and surely noticed by every single member of Congress. Quite a formidable machine to counter. That's just one example. The Department of Education has its own lobbyists on Capitol Hill. And, lest you think they do not contribute to Members of Congress' campaigns...I'm sure Duncan and Obama will be headlining quite a few fundraisers between now and November, 2010. The hypocrisy is very disappointing.

I believed the President when he said he wanted to hear all ideas and is willing to change his mind if they're better than his. Clearly, that was just campaign rhetoric.

It is absolutely astounding to see "Mark Adams" describe how the "free market" will drive down price, when the key element of that market is a public subsidy - to the loan provider and NOT to the loan itself! Such a ridiculous claptrap of "competition" when all that competition does is suck the federal resources that ought to go to tuition itself.

Given the degree to which this entire industry has become accustomed to subsidies, and then to protection against the bankruptcies they precipitate, and then to escalating loan servicing fees to create a permanent under class, it is probable that they are so "socialized" that they perceive a direct loan as "socialism" and their own brand of "competition" as a "free market." Yet they really ought to shift to some other language, since their self-dealing is so palpably obvious that, on the face of it, their arguments are ridiculous. Do they really expect us to think they are philanthropists on purpose? Then, perhaps, they ought to go back to that earlier vulnerability to bankruptcy.

Joe is correct, you can't talk about FFELP being a true free market. But where he is wrong & doesn't understand, is that without these subsidies, the once variable rates on student loans needed this subsidy to entice the private companies to offer below market rates to the student borrower. One should also understand that for newly originated loans which are now a fixed rate, these private lenders are sending excess money back in relation to these "subsidies". The current Special Allowance for in school unsubsidized Stafford Loans is (Average 3-Month Financial CP + 1.19% - 6.80%). For the last quarter, Average 3-month Financial CP was 2.58%. So 2.58 + 1.19 - 6.80 = (3.03%). So the lenders would’ve collected/accrued 6.80% from the student borrower, only to send back 3.03% to the government in negative special allowance. This leaves the lenders earning 3.77% on each loan. As long as Financial CP rates are below 5.61%, lenders would have to send back these excess earnings (so-called subsidies) to the DOE. But you won’t hear that angle from Obama’s team. It’s their way to increase spending on Pell Grants & act like it’s at a net cost of zero to the taxpayer, which is deceiving. I agree spending on Pell Grants needs to be done, but not at the cost of the elimination of the program that promotes competition in a very competitive environment. And we all know who benefits the most from competition, the consumer (student). I am really unsure where the government comes up with their cost savings. Are they factoring in the income taxes these private companies have to pay on their earnings? Doubt it. Are they factoring in the incentive for lenders to prevent borrowers from defaulting due to the lenders only being guaranteed at 97% (taxpayer on the hook), versus the 100% the taxpayer is on the hook for under Direct Lending? Nope. I can guarantee you that if you did eliminate the so-called "bad subsidies" and allowed private lenders to receive 100% of the 6.80% the student pays, the lenders would be extremely happy. It's not like the government can go back & eliminate these subsidies, it has to be on a go-forward basis.

It would behoove President Obama's team to consider this issue from the consumer's perspective. Like all other debates in Higher Education Finance, the interests of the students are not represented, and they should be, because this plan appears to lay the ground work for an even MORE predatory environment than what we have now, which I did not think was possible. Consider this argument, and correct me if I am wrong:

Under the new Direct-only plan, companies like Sallie Mae will still be servicing the loans, and collecting on defaulted loans. The only difference is that the federal government will be ponying up the cash up front (and making earning a "profit" on the interest).

I can see how this is a great good thing for the taxpayers: No more subsidy payments, and no more guarantors sucking up all that collection revenue. Great.

With only these two funding streams, however, companies like Sallie Mae could have an INCREASED incentive to default a loan, since if a loan doesn't default, they will never see it again, whereas if they collect servicing income on a loan for a few years, and the loan eventually defaults, their collection company can get a second bite at the apple, now exploded with fees.

Therefore, it appears that the same perverse incentive to default a loan will persist, and could increased.

This is the same wolf, but in sheep's clothing.

When are influential players here going to actually wake up to the needs of the consumer, instead of using well honed, and overly sophisticated arguments that make it appear that they have?

When are the players here going to acknowledge the core issue here: that it was wrong to remove standard consumer protections from student loans in the first place?

Simple enough: Sallie Mae issues $20k in loans. They student defaults (after huge capitalization through deferments) - Sallie Mae puts the loan back to the government after late fees, penalities and capitalizing a much higher interest rate. That $20k loan guaranteed by the taxpayer is now more than $40k. Sallie takes that money and fuels up one of their three corporate jets so their CEO can take a break from one of his two mansioned estates. Obviously it's not to go golfing as Mr. Lord has his own private 18 hole golf course at one of these estates. Is this what the taxpayer paid for?

Free market - please, stick your head back in the sand. Preferred Lender programs, school as lender programs - not to mentioned the student loan administrators who lost their jobs for kickbacks at such mainstream schools as USC, Columbia, Johns Hopkins, etc. The whole thing is rigged! This has been an ongoing skim job for years. Certain politicians have been paid to protect this skim job - we all know Buck McKeon, John Boehner and now we have to include Lamar Alexander as those paid to play with Sallie.

Student Loan providers are nothing but skimming middle men bringing no value to the equation. The loans are guaranteed by the taxpayer -- maybe the taxpayer shouldn't have to fund all the excess, greed, and arrogance of a CEO who lacks the self discipline to handle an analyst conference call without uttering vulgarities causing his stock to tumble. No one wants nationalization or socialism - but this is an outright scam on the American taxpayer that needs to end.

Reform of the student loan industry is needed. My wife recently got accepted for Nursing School in Boston, we are going to have to get a loan for $100,000 or more. Which is a lot of money considering we are going to have to relocate to Boston, and I am going to have to get a new job once we move and find a way to do that while taking care of my Autistic child.

Nursing school is expensive and I am realizing that these good nursing jobs are nearly unattainable to those who cant afford or can't borrow the money to go to school.

Obama is right to start the process if reforming this system. I for one can't understand why you would have a system guaranteed by the taxpayer, not earn money for the taxpayer, but  instead  for middlemen in what should be of a straightforward transaction. I just hope some reform can start soon before my wife starts school in September.