Direct Lending

Greetings from the Financial Aid Office!

Ed Policy — Thu, 19 Nov 2009 16:30:00 -0500

[Last week, we reported (see here and here) on the fact that some of the student loan industry's most fervent supporters in the financial aid world are potentially putting their schools and students at risk by refusing to take even the initial steps to prepare for a possible shift to direct lending next fall. Since then, we've been wondering how these aid directors would explain their inaction to students. So, after hearing the comments that financial aid administrators and lenders made at last week's Lexington Institute event and on the Finaid-L listserv, we decided to write up a fictional account of how these aid officials might explain themselves. We hope you enjoy it.]

Dear Students,

As you may have heard, we have recently taken action that could potentially disrupt your ability to obtain federal student loans next fall. But we want to assure you that there is absolutely nothing to worry about. Our good friends in the student loan industry have a sure-fire strategy in place to stop any efforts in Washington that would force us to change the way we do business. And for that we're very grateful because we can't imagine doing things any other way.

Here's some background. Last month, we received a letter from U.S Secretary of Education Arne Duncan urging us to take at least the initial steps to become "Direct Loan-ready" for the 2010-11 academic year. As you may know, the Obama administration has proposed ending the Federal Family Education Loan (FFEL) program in favor of 100 percent direct lending. Under the plan, tens of billions of dollars in savings from making the switch, and eliminating lender subsidies, would be used to provide a substantial boost in spending on Pell Grants, which go to the most financially needy students. This may sound good but it won't help us much because we don't enroll many of those students. In other words, the upper middle income students we predominantly serve will be left out in the cold!

Now it's not exactly clear where this legislation is headed. As of now the measure appears to be stalled in the Senate, where the never-ending health care debate drags on. But even if this bill doesn't go anywhere, we won't be out of the woods. That's because a federal law that has been propping up the FFEL program over the last year and half -- known as ECASLA -- is set to expire in July and neither the Obama administration nor Congressional Democrats want to extend it. If lenders can't get access to government financing to make federal student loans, the FFEL program will be sunk. At least that's the excuse Secretary Duncan is giving us for why we need to be prepared to flip the switch. But we told him to take a hike. That's a lot of nerve, telling us how to run a federal program that benefits students.

You see we used to be in the Direct Loan program more than a dozen years ago, and the program ran into some administrative difficulties. At the same time, Republican Congressional leaders tried to kill direct lending, and when that failed, they did everything they could to put it at a competitive disadvantage to FFEL, including preventing the U.S Department of Education from being able to market the program to schools and preserving generous subsidies for lenders that they used to woo financial aid offices like ours. So it is not surprising that we had lenders literally banging down our doors each week trying to convince us to switch back to FFEL. Some of the offers they made were just too good to pass up, and they are worth holding out for despite what the Obama administration says! [Enough said about that. We don't want to get into any details just in case that jerk Cuomo gets hold of this letter -- no offense intended, of course, Mr. Attorney General.]

Yes, we know that some of our colleagues in the financial aid world have made the switch to direct lending and say that it went much more smoothly than they had imagined. The problems we experienced a dozen years ago have long since been fixed, they say, and in fact are ancient history. But do we really want to take that risk? Our lender friends -- at least those that in the student loan business because of the help they received as a result of ECASLA -- say we shouldn't. Because after all, what has the government ever done right?

So please don't be worried about your loans because there's really no need for concern. Our friends in the loan industry assure us that they can spread enough fear and confusion on Capitol Hill to convince Congress that a switch to 100 percent direct lending would lead to a catastrophic breakdown. But in order to help them, we must do our part. If enough colleges like us dig in their heels, and refuse to take even the most rudimentary steps to prepare, we may be able to help lenders scare lawmakers away from enacting any real student loan reform and maybe even get them to extend ECASLA for another year.

So have no fear. This is definitely a gamble worth taking. Because if there's anything the loan industry does well, it's spreading fear and confusion. What else do you think they hire those high-priced lobbying and communication firms to do?

Sincerely,

Your trusty financial aid director

The Loan Industry’s Friends in Congress Go on the Attack

Stephen Burd — Fri, 13 Nov 2009 13:45:00 -0500

Earlier this week, we called attention to the fact that some of the student loan industry's most fervent supporters in the financial aid world are potentially putting their schools and students at risk by refusing to take even the initial steps to prepare for the possible shift to direct lending next fall.

This is particularly worrisome, because as we wrote, no matter what happens with the student loan reform legislation that Congress is considering, the end of the Federal Family Education Loan (FFEL) program is coming. That's because an emergency law that is currently propping up FFEL, the Ensuring Continued Access to Student Loans Act (ECASLA), is set to expire this summer and neither the Obama administration nor Democratic Congressional leaders are interested in extending it. So unless the financial markets improve enough so that lenders do not have to depend on federal financing to make government-backed loans to students, colleges will likely have to shift to direct lending.

Department of Education officials have been trying to get that message out. Late last month, Secretary of Education Arne Duncan sent a letter to colleges that have not taken any steps yet to start preparing for a possible conversion. "While there are encouraging signs that financial markets are rebounding, the most prudent course of action is for you to ensure that your institution is Direct Loan-ready for the 2010-2011 academic year," he wrote. "That way, loan access to your students will be assured."

The Education Secretary's letter set off a firestorm of controversy on Capitol Hill, with the student loan industry's closest allies in Congress falling all over themselves to be the first to condemn the Obama administration of strong-arming colleges. Both the Democrat Ben Nelson and the Republican Mike Johanns from the great State of Nelnet (whoops, we mean Nebraska) sent letters to Duncan (see here and here) last week expressing their outrage.

"The Obama Administration seems intent on denying competition and ramming through a federally-run student loan system," Johanns said in a news release. "By encouraging institutions of higher learning to move quickly to a government-run system, it appears the White House is trying to end run Congress and strong-arm its way toward nationalizing the student loan industry." [Note to Johanns, the FFEL program is a government program too.]

Rep. John Kline (pictured top left), the lead Republican on the House of Representatives Committee on Education and Labor, went even further. In his own letter to Duncan, he accused the Education Department of violating a federal law that prohibits government agencies from distributing "literature that promotes public support for or opposition to any legislative proposal on which Congressional action is not complete."

"While this debate proceeds in Congress, the U.S. Department of Education must act as an impartial agent to assist colleges and universities, not as an advocate for its preferred legislative changes to the federal student loan program," Kline wrote.

At Higher Ed Watch, we believe these allegations are outrageous. Duncan is not asking colleges to flip the switch and make the shift to the Direct Loan program right away. He is simply urging colleges to prepare for the possibility that they will have to transition to direct lending when ECASLA ends. This is indeed the prudent course to take.

After all, Obama adminstration officials know that if there are any disruptions in student loan delivery next year, Johanns, Kline, and Nelson will be among the first to go on the attack, accusing the Education Department of being inadequately prepared. In fact, these lawmakers want to have it both ways. They want to impede the Department's efforts to get colleges ready for a possible conversion but then also be able to blame the administration if any mishaps occur.

These lawmakers' constituents -- the students and families in their states that rely on student loans to pay for college -- deserve better. They need to know that the colleges that serve them are adequately prepared no matter what happens next fall.

Delay or No Delay, Change is on the Way

Stephen Burd — Wed, 11 Nov 2009 02:00:00 -0500

Back in September, we predicted that we'd all be in for "a wild ride" as legislation to overhaul the federal student loan programs makes its way through Congress. Boy, were we wrong.

Instead, progress on the legislation, which would eliminate the Federal Family Education Loan (FFEL) program in favor of 100 percent direct lending, has come to a grinding halt. Senate Democratic leaders have put the student loan bill on hold until they come to a resolution on the sweeping health care reform legislation that has deeply divided the chamber. Senate Majority Leader Harry Reid's recent admission that he may not be able to get a vote on the President's top domestic priority by year's end means that the student loan measure may not make it to the Senate floor until next January or February at the earliest.

The fate of the student loan and health care measures are intertwined because Senate leaders continue to hold out the possibility of using the budget reconciliation process (the vehicle through which the student loan bill will ultimately be moved) to push through the health care overhaul. While it seems unlikely that they will go down this route (as many of the reforms they are proposing would not survive this type of parliamentary maneuver), they may not have any other choice if they can't get the votes they need to defeat a Republican-led filibuster of the measure.

For the moment, the seemingly interminable delay appears to be playing into the hands of the student loan industry and their allies in the financial aid world. It has given industry officials (and their friends at Qorvis Communications) time to launch a large-scale effort to try and manufacture "grassroots" opposition to the legislation. It has also helped them stoke fears in Congress that colleges will not be ready to switch to direct lending before the peak student aid processing season begins.

But student loan industry officials can not take comfort in this delay. As we wrote in April, no matter what happens with this legislation, the end of the FFEL program is coming. That's because an emergency law that is currently propping up FFEL -- the Ensuring Continued Access to Student Loans Act (ECASLA) -- is set to expire next July and neither the Obama administration nor Democratic Congressional leaders are interested in extending it. So unless a miracle occurs, and the financial markets improve enough so that lenders do not have to depend on federal financing to make government-backed loans to students, colleges will have no choice but to shift to direct lending anyway.

Most loan industry officials recognize that reform is inevitable. That's why they have been pushing Congress so aggressively to adopt an alternative student loan proposal that would achieve some of the President's objectives but would preserve as much of the status quo as possible -- through carve outs and set asides for different student loan players.

Unfortunately, some of the industry's most fervent supporters in the financial aid world have not gotten the message. Instead they have buried their heads in the sand, and declined to take even the initial steps needed to prepare for the possibility that their schools will have to shift to direct lending. These school officials are the first to rail at Congress about the risk of transitioning so many schools to direct lending in such a short period of time. Yet, because of their ties to lenders, they are leaving their schools and students dangerously unprepared for such a change. If there are disruptions in loan delivery on their campuses, they will have only themselves to blame.

At Higher Ed Watch, we remain confident that Congress will eventually get the student loan reform bill back on track and pass it. But to use the delay for an excuse for inaction is simply irresponsible -- because no matter what lawmakers do, change is on the way.

The Student Loan Industry’s Messaging Machine at Work

Stephen Burd — Thu, 22 Oct 2009 17:45:00 -0400

As we reported on Tuesday, Qorvis Communications, a top public relations firm in Washington, has taken the lead in the student loan industry's efforts to manufacture grassroots student opposition to legislation that would eliminate the Federal Family Education Loan (FFEL) program. But getting students to rally behind an unpopular industry that profits from their indebtedness has not proven to be an easy task. The firm's desperation has become all too evident in recent weeks.

Take, for instance, the case of Patrick McBride. In a press release announcing the launch of its "Protect Student Choice" public relations effort, Qorvis officials listed McBride, a student at Vanderbilt University, as one of four "local campaign members" -- with the others being leaders of non-profit student loan agencies.

But who is McBride? A former colleague of ours, the enterprising Ben Miller of Education Sector, sought to find out. In an interview he conducted with McBride, Miller learned that he was a first-semester freshman who got interested in the issue while doing research on the Internet. McBride, who would not say whether or not he had taken out student loans (although he added that he "did not have a stake" in the issue), was initially "ambivalent" about the student loan reform legislation. But after talking to David Mohning, the university's financial aid director and a longtime supporter of the FFEL program, he was convinced that the bill was a bad idea.

McBride then wrote a column for the school's conservative publication the Vanderbilt Torch, decrying the measure as a "government intrusion into private markets" [despite the fact that FFEL is already a government program]. Soon after, Qorvis contacted him, asking whether he would be interested in participating in its campaign.

To be absolutely clear, we do not have any beef with McBride. Individuals are entitled to their own opinions, and far be it for us to object to them expressing their views in writing. But isn't it telling that after working for months to manufacture grassroots opposition among students, this is the best they could come up with? A first semester freshman, who may not have even borrowed student loans, writes a column in a college publication and suddenly becomes one of the campaign's chief spokesmen???

But contrary to reports, McBride is not the only student that Qorvis has recruited for this effort. The firm has actively courted the College Republican National Committee to mobilize its members to speak out against the legislation. Uncharacteristically, the group, which typically focuses on helping elect Republican candidates and training future Party leaders rather than taking positions on specific legislation, recently agreed to take part in the campaign.

Zach Howell, the national chairman of the College Republicans, made the announcement during a faux television interview conducted by Karen Hanretty, a managing director at Qorvis who previously served as the communications director for the National Republican Congressional Committee. "We're engaging our membership in any way we can on this issue," Howell said. "It certainly is important to them and to the future of higher education in this country."

During the interview, Howell acknowledged that he had not done a lot of research on the issue and demonstrated that he didn't fully understand how the federal student loan programs work. For instance, he warned that a shift to 100 percent direct lending would result in having "rates set in Washington," when of course they already are. He raised the specter of "long lines" at the financial aid office and "poor service," and said that "all sorts of burdensome regulations and difficulties will be placed on students and schools." The one example he gave was of California Polytechnic State University, whose "depleted Financial Aid office" (as described by the student newspaper) appears to have perennial problems administering federal financial aid (see here and here). Howell neglected to mention that the vast majority of schools that have made the transition to the Direct Loan program so far have found the process to be easier than they thought.

But, of course, it makes little difference to Qorvis officials whether the students it recruits have a firm grasp of what they are talking about (those who do probably wouldn't want to shill for the loan industry). They are simply looking for warm bodies to make it appear that there is a genuine grass roots movement against the legislation. Focusing on the College Republicans seems like an odd choice, considering that the bill's fate rests in the hands of moderate Democrats. The group does, however, boast of having more than 200,000 members and if the individual students are not upfront about their affiliation when they contact their lawmakers, they could provide the illusion that there is genuine student angst over the bill.

As we said on Tuesday, this is a truly cynical effort. It is indeed a prime example of special interest lobbying at its worst.

Exclusive: A Peek into the Student Loan Industry’s Messaging Machine

Stephen Burd — Tue, 20 Oct 2009 21:45:00 -0400

It's no wonder Americans are deeply suspicious of special interest lobbyists in Washington. Take the student loan industry's latest efforts to kill legislation pending in Congress that would end the Federal Family Education Loan program. It's a prime example of special interest lobbying at its worst.

In 2007, shortly after President Bush signed into law a bill cutting government subsidies to lenders and guaranty agencies, the student loan industry bought into a new strategy to thwart any future Congressional action that might reduce its subsidies further: manufactured grass roots opposition (otherwise known as astroturfing). With Democrats firmly in control of Congress and in a good position to take back the White House in the upcoming presidential election, industry officials knew that the FFEL program was in jeopardy.

Enter Qorvis Communications, a prominent Washington-based public relations firm that had gained notoriety earlier in the decade for its work on behalf of the Saudi Arabian government. Eager for the loan industry's business, one of the firm's partners made a pitch for the company at the 2007 legislative conference of the National Council of Higher Education Loan Programs, a trade group that represents guaranty agencies and non-profit lenders. In a power-point presentation entitled "What Just Hit Us?", this Qorvis executive said that the loan industry had lost the loan subsidy battle because it "had no organized constituency" to "counter" its critics.

"The messages and messengers we used to defend the program were not effective and thus we need new voices, new messages, and new ways to mobilize these voices," he stated.

The industry, he said, especially needed to wage a campaign to get students and their parents to speak out on its behalf. Lenders and guarantors could do this by reaching out to student organizations and parent groups, as well as spreading their message over the Internet through social networking sites like Facebook, blogs, and a website dedicated to the cause of preserving FFEL.

Qorvis, the executive said, was uniquely qualified to carry out this campaign because of its previous work building grassroots networks on college campuses dedicated to giving "students a voice in the national debate surrounding digital rights and freedoms in the 21^st Century." He suggested that the firm would be able tap into these networks to mobilize students to speak out in favor of the FFEL program.

"There are now fifteen chapters on campuses nationwide where students meet to discuss current events in technology policy and take action to support or oppose relevant legislation -- and more importantly, to recruit more advocates for us [emphasis included in original text]."

Qorvis got the job on the strength of his pitch. Now two years later, with the FFEL program facing possible extinction, we can see how this strategy has worked out. The loan industry is still struggling to generate grassroots support from anyone other than those who have a vested interest in the program's survival -- particularly loan company employees and financial aid administrators who serve on lender and guaranty agency boards and/or belong to state associations that depend heavily on student loan providers for financial support.

Despite the efforts of the loan industry and the Qorvis communication team, students and their parents are not rushing the barricades to demand that lenders be allowed to continue collecting generous subsidies for making virtually risk-free loans. Evidently, digital rights supporters on campuses aren't interested in being used as pawns in the battle over the future of the FFEL program. Perhaps they're also wise to the fact that the pending legislation pits student grant aid increases against lender subsidies. Did lenders really think students would choose the latter?

As we've said before, the indifference of students to the lenders' plight shouldn't come as a surprise, considering that the terms and conditions of federal student loans are pretty much identical whether they come from the loan industry or from the U.S. Department of Education's Direct Lending program.

In our next post, we will take a closer look at the loan industry's increasingly desperate efforts to show that it has students on its side. Stay tuned.

Sweeping the Student Loan Scandal Under the Rug

Stephen Burd — Tue, 13 Oct 2009 15:45:00 -0400

The student loan industry must think we all have very short memories. As part of their effort to derail legislation that would eliminate the Federal Family Education Loan (FFEL) program, lenders have been sharing talking points with Senators and staff arguing that the “pay for play” scandals that engulfed the student loan industry in 2007 were much ado about nothing.

“After thorough investigations by Congress and various state Attorneys General, there were no findings that any employee or a lending institution or school broke any laws, nor were there any criminal penalties levied,” lenders wrote in talking points -- which Higher Ed Watch has obtained -- that were distributed to Senate staff.

While that statement may have been technically true at the time it was first made, it’s a brazen sweeping under the rug of a scandal that outraged the American public, particularly college students and their parents. New York Attorney General Andrew Cuomo did charge about a dozen colleges and lenders, such as loan giants Sallie Mae and Nelnet, with violating federal and state laws, and filed lawsuits against them. But instead of fighting Cuomo, the student loan companies and schools quickly reached settlement agreements with his office that required them to change their conduct. In other words, they were not confident enough about the legality of their practices to defend them in court.

The lenders’ claim is particularly cavalier given that they were only able to avoid being penalized because of who was guarding the henhouse. Bush Administration appointees at the U.S. Department of Education with strong ties to the student loan industry simply looked the other way while lenders and college financial aid offices engaged in kickback schemes.

Despite all the evidence that lenders were routinely violating federal law by providing illegal inducements to colleges to win student loan business, the Education Department refused to discipline even a single one of these companies. The Department did not even consider penalizing Student Loan Xpress, which, as we discovered, gave insider stock to leading college officials, not to mention a senior Education Department employee, in order to curry favor.

However, with new leadership at the Education Department, the loan industry can no longer rely on the lax enforcement that allowed it to deny the significance of the “pay for play” scandal in its talking points. Case in point: late last month, the Department ordered the Iowa Student Loan Liquidity Corporation (ISL) to repay the federal government nearly $16 million after finding that officials with the non-profit student loan agency paid off the alumni association at one of the state’s flagship universities to steer borrowers their way.

At issue is an “affinity agreement” that ISL officials forged with Iowa State University’s alumni association in June 2006 in order to get it to exclusively market their federal consolidation loan product to its members. Under the deal, ISL agreed to pay the association $35,000 a year, and to make additional payments based on the number of completed consolidation loan applications generated through the group’s promotional efforts. For example, if the association was able to bring in 300 and 399 completed applications a year, it would be paid $25 per application. But if it was able to bring in 600 or more, it would get $75 per application.

The loan agency and the alumni association terminated the deal in May 2007, about two weeks after The Des Moines Register first reported on it. At the time, media attention on the student loan scandal was at its height, with revelations about sweetheart deals between lenders and schools coming out on almost a daily basis.

ISL officials have denied any wrongdoing. They say that federal regulations that were in place at the time allowed them to pay colleges a reasonable fee for administering their loans. But in its program review report on the case, the Education Department rejected that argument out of hand. “Based on the documentation reviewed, ISL’s payments exceeded reasonable compensation for costs and were based on loan volume in violation” of federal law, the Department’s investigators wrote. Because the violations were so “serious,” the report says, further penalties to the loan agency are being considered, including limiting, suspending, or terminating its future participation in the federal student loan program.

ISL is not the only loan company that is coming under scrutiny. In August, Nelnet revealed that the Education Department was investigating its past loan practices, and had, in an early draft program review report, found the Nebraska-based lender out of compliance “with the Higher Education Act’s prohibited inducement provisions.” It’s unclear when a final report will be released.

Nelnet was particularly aggressive in making exclusive deals with university alumni associations to recommend its consolidation loans to their members. In 2007, the Nebraska-based lender canceled the “affinity” arrangements it had with 120 alumni associations, as part of a settlement agreement with Attorney General Cuomo’s office. So it would not come as much of a surprise if this is one of the areas of “noncompliance” on which the Education Department is focused.

Given the Department’s recent actions and renewed interest in enforcement, the student loan industry would be well advised to drop this particular talking point if it wants to maintain any credibility on Capitol Hill.

The Astroturf Lobby

Ed Policy — Thu, 24 Sep 2009 20:00:00 -0400

Pity the student loan industry. Even with the Federal Family Education Loan (FFEL) program on the verge of extinction, the industry's plight has not generated grass-roots opposition from anyone other than those who have a vested interest in the program's survival (yes, that includes financial aid administrators who serve on lender and guaranty agency advisory boards and/or belong to state associations that depend heavily on student loan providers for leadership and financial support).

There have not been any angry town hall meetings with citizens raging about a government takeover of this federal program. Students and their parents are not rushing the barricades to demand that lenders be allowed to continue collecting generous subsidies for making virtually risk-free loans.

The indifference of students and their families to President Obama's proposal to kill FFEL shouldn't come as a surprise -- as the terms and conditions of federal student loans are pretty much identical whether they come from the loan industry or from the U.S. Department of Education's Direct Lending program. And despite the loan industry's best efforts, students are not up in arms about losing their ability to choose their own lenders -- because they've never really had much of a choice at all and most really couldn't care less about where their federal loans come from, as long as they get the money on time to pay their college bills. Furthermore, students have never been able to choose between Direct Loans and FFEL, despite the collective misunderstandings of some Senate Republicans, the Heritage Foundation, and The Wall Street Journal. Only colleges and universities can choose which program their respective students borrow under, and it's extremely unlikely that any student has chosen a college based on its participation in either Direct Lending or FFEL.

But just because there hasn't been a groundswell of opposition to the President's plan (and the House bill that would enact it) doesn't mean that loan industry can not try to generate grass roots opposition itself. In a classic case of astroturf lobbying, the lobbying organization America's Student Loan Providers is hosting a "Virtual Hill Day" this week to get "financial aid professionals, [lender and guaranty agency] employees, students, parents, and concerned citizens" to contact all 100 Senators to express their opposition to legislation that would eliminate FFEL. The group has helpfully provided "scripts" for those it wrangles up to speak on its behalf.

At the risk of spreading the industry's messaging further, we have included the scripts below. We thought our readers would be interested to see what lenders are telling people to say:

National Virtual Capitol Hill days

Discussion Guides

No. 1

My name is _____. I'm calling to ask the Senator to vote to protect valuable student loan jobs here in ____.

The guaranteed student loan program has helped families all across the state get a college education. It sponsors free college nights, helps students navigate the financial aid process and works with borrowers to avoid default. Please tell the senator to support student loan reform that preserves options and important services for students, while protecting jobs here in ___. Thank you.

No. 2

My name is __________ and I live in ___________. I'm calling about a student loan proposal that really concerns me.

I think it's a mistake for the government to take over all federal student loans and replace local jobs. The guaranteed student loan program has helped many families in this state get a college education. It also has provided me with a quality job that helps me support my family. In this recession, I can't afford to lose my job.

Please tell the senator to support reform that preserves valuable services for families and protects jobs. Thank you.

No. 3

My name is_____________. I'm calling because I'm worried about my job here in ____. Please tell Senator _____ to vote for a student loan reform plan that preserves competition and choice for students and colleges.

There is a broad coalition supporting a community proposal that builds on the President's plan and delivers billions of dollars for Pell Grants, while also protecting important services for students and families and my job. It's a win for students, taxpayers, and local jobs. Thank you.

No. 4

My name is __________ and I live in __________. I'm very worried about a proposal that would have the federal government take over the student loan program, replacing those like myself who are helping students and families in our State.

I've worked in student loans for __ years and I know first-hand how families benefit from the services [name of organization] provides. With unemployment on the rise, we need to continue these important services.

Please tell the senator that there are alternative reform proposals that preserve these services for students, while protecting jobs like mine. Thank you.

On to the Senate...

Stephen Burd — Tue, 22 Sep 2009 19:40:00 -0400

Legislation that the U.S. House of Representatives approved last week would make landmark changes to the federal student loan programs -- changes that we have advocated at Higher Ed Watch for the last three years.

We can not overstate the significance of this achievement. Despite fierce opposition from the deep-pocketed student loan industry and their allies on Capitol Hill, the House moved forward with a bill that would eliminate unnecessary middlemen from the process of originating and guaranteeing federal student loans, and would have the government make all federal student loans directly. If this change is enacted into law, it will overwhelmingly simplify the federal student loan program and redirect a massive amount of federal funds out of the pockets of lenders and into the hands of the students who need the help the most.

Having said that, the House bill is far from perfect. The measure contains one provision that we believe is extremely misguided and will, if enacted, harm the cause of student loan reform, and another that would gut a key consumer protection provision in federal law that aims to safeguard students from unscrupulous trade schools. It also has other provisions that are well-intentioned but, as written, are unlikely to achieve the lofty goals the bill's authors have set for them.

Attention will soon shift to the Senate, where the leaders of the Health, Education, Labor and Pensions (HELP) Committee are expected to release their own version of the student loan reform legislation shortly. While the Senate committee will likely stick to the same broad outlines as the House, it could make a few key changes that would significantly strengthen the measure.

Here are some changes that we would like to see:

Make non-profit lenders compete for servicing contracts:

As we have previously reported, the House bill includes a set-aside for nonprofit student loan agencies to service federal student loans that is nearly identical to a proposal that the Education Finance Council (EFC), which represents these lenders, quietly shopped around Capitol Hill this summer. The legislation would essentially give each and every one of EFC's members a no-bid contract to service the loans of up to 100,000 student loan borrowers in their home states.

What's more, when the bill was on the floor last week, the House agreed to an amendment, sponsored by Rep. George Miller, the Democratic chairman of the Committee on Education and Labor, that would sweeten the pot for these non-profit student loan companies even further. Under the original version of the legislation, these non-profit agencies would have been paid "a competitive market rate as determined by the [Education] Secretary" to service these loans. The measure allowed -- but did not require -- the Secretary to take into account the volume of loans an agency services when making that determination, presumably to help even the smallest entities survive. Under the amended legislation, the Secretary would now be required to set the payment rate at a level that is "commercially reasonable in relation to the volume of loans being serviced" and is high enough so that "the eligible not-for-profit servicer can reasonably provide any additional services, such as default aversion or outreach, provided for in the contracts awarded."

Speaking to education bloggers last week, Representative Miller said that including these provisions in bill was "absolutely" essential to the bill's passage. "You have members of Congress who are very familiar with their nonprofit and state agencies, and they like the attention they give to their students and schools." At the very least, it's unlikely that the bill would have passed by such a wide margin (253 to 171) without making these types of concessions. Miller won the support of all but four of his Democratic colleagues.

At Higher Ed Watch, we understand that there are political tradeoffs that have to be made to win support for the type of landmark legislation. However, we find the provisions particularly troubling because the history of the FFEL program is replete with these types of political tradeoffs and set asides, which have made the program administratively cumbersome, inefficient, and vulnerable to waste and abuse.

To be absolutely clear, we have no problem with allowing non-profit lenders to compete for a servicing contract from the Education Department. But they should not be treated more favorably -- or compensated more generously -- than their competitors.

Do not weaken key consumer protection provisions

The House bill would continue recent efforts by lawmakers to gut the "90-10 rule," which aims to protect financially needy students from unscrupulous proprietary institutions. The rule requires for-profit colleges to receive at least 10 percent of their revenue from sources other than federal student aid to continue to participate in the government's financial aid programs.

Congress introduced the requirement in 1992 (at that time it was the "85-15 rule") as part of a broader effort to crack down on trade schools set up to reap profits from the federal student aid programs. At the time, lawmakers felt that the provision was important because it required proprietary institutions to prove that the training they offered was valuable. They figured that schools that offered worthwhile training would be able to derive at least a small portion of their revenue from students willing to spend their own money on it.

Proprietary school lobbyists have spent years and lots of campaign cash trying to get lawmakers to eliminate the requirement or at least weaken it so much that their institutions could easily evade it. And they have largely succeeded in this pursuit.

The bill the House approved last week would extend by an extra year (from two to three) the amount of time that schools can be out of compliance with the law before being penalized. It also would temporarily exempt from the 90-10 calculations any new money the colleges receive from the legislation's expansion of the Perkins Loan program, and extend an existing exemption for federal student loan limit increases that were approved as part of the Ensuring Continued Access to Loans Act last year.

At a time when the Obama administration is looking to rewrite federal student aid rules to improve the integrity of the programs, it doesn't make sense for Democratic Congressional leaders to weaken one of the few consumer protection provisions we still have.

Revamp the proposed Perkins Loans funding formula changes

At the behest of the Obama administration, the legislation the House approved would significantly overhaul and expand the Perkins Loan program to help financially needy students avoid having to take out expensive private loans. We agree that this is a vital goal. But as our former colleague Ben Miller of Education Sector has pointed out, the proposed changes in the loan program's funding formula try to do too much and will likely "result in a bunch of challenges being tackled in a mediocre manner."

The House bill would convert the Perkins loan program from a campus-based revolving loan fund to an extension of the Direct Loan program. It would also substantially increase funding for the program, from $1 billion to $6-billion in new loan volume each year. The Department of Education would disburse half of these funds to colleges based on the financial need of their students. The other half would go to rewarding colleges that keep their tuition and fees low, relative to other institutions in their sectors, and to colleges that graduate a large portion of their Pell Grant recipients.

We agree that these are all important aims, but can they all be achieved through the Perkins Loan program? We would like to see the Senate committee choose an overreaching goal and stick with it. Our vote would be to provide the most generous awards to colleges that enroll the largest proportions of low-income students and are most successful in graduating them. The institutions that would benefit the most would be the top performers in their sectors, or those in each sector that show the most improvement over a period of time. Of course, protections should be added to ensure that schools are not just lowering their academic standards to make it easier for their students to graduate.

Helping low-income students avoid taking out high-cost private student loans -- with variable, uncapped rates and few consumer protections -- should be among our top priorities.

Consider alternatives to the "Access and Completion Grants"

This provision has a worthy goal of providing grants to states and colleges to improve their efforts in increasing the academic preparation and college awareness of low-income students. But unfortunately, the language in the bill is so convoluted that, even after multiple readings, it's difficult to know whether the provision will be effective in achieving its aims. A large share of the blame rests with the Obama administration, which never clearly articulated the purpose of this new program. At times, the administration seemed to suggest that much of the $2.5 billion devoted to this effort should go to student loan guaranty agencies as a pay-off to blunt their opposition to the overall student loan reform legislation. We think this would be a terrible way to spend the money, given that there is little empirical evidence to suggest that guarantors do a particularly good job carrying out college access activities.

While we support providing competitive grants and colleges for coordinating their college outreach efforts and forming partnerships with public school systems to improve the preparation of their students, we would also urge the Senate to consider significantly expanding the existing Gaining Early Awareness and Readiness for Undergraduate Programs, which already aims to accomplish these goals. Under GEAR UP, colleges and states partner with schools to provide counseling, mentoring, academic support, and college outreach services to entire grades of disadvantaged students. The partnerships serve these students for seven years, starting no later than seventh grade and continuing through at least high school graduation.

Funding for GEAR UP, however, has been stagnant for much of the last decade, limiting the program's effectiveness. For example, many partnerships have been serving only one grade level in a school, rather than multiple cohorts, as the program's creators envisioned. The benefit of directing savings from ending FFEL to GEAR UP is that a relatively modest increase -- doubling or tripling the program's budget, which is currently about $313 million -- would go a long way to improving its performance and expanding its reach.

In exchange for the additional money, Congress should require the partnerships to serve multiple cohorts or even whole schools of low-income students, rather than just individual grade levels at the schools.

The Senate HELP committee has a great opportunity to make substantial improvements to the House student loan reform bill. We will soon know whether the panel seizes it.

The Loan Industry’s Talking Points

Ed Policy — Wed, 16 Sep 2009 17:15:00 -0400

With the U.S. House of Representatives poised to take up legislation that would eliminate the Federal Family Education Loan (FFEL) program and provide all federal student loans directly from the government, lawmakers opposed to the plan are coming armed with talking points straight from the student loan industry. Unfortunately for these legislators, many of the lenders' arguments against the Direct Loan program just don't stand up to scrutiny.

At Higher Ed Watch, we have expended a lot of ink (or at least a lot of blog space) over the last six months analyzing and critiquing the loan industry's arguments. In preparation for House floor action on the legislation, we thought it would be a good time to revisit some of the lenders' most dubious claims and to run excerpts from previous posts that responded to them.

Here are some of the arguments you're likely to hear and our take on them:

Argument: By proposing to provide federal student loans entirely through the Direct Lending (DL) program, the Obama administration and Democratic Congressional leaders are trying to "nationalize" or impose a "government takeover" of the federal student loan program.

Our Response: "We have news for the lenders: it is impossible to nationalize a government program. By definition, the FFEL program is already a nationalized program because it is a government program, just like direct lending...Sorry, lenders; it's a little late to complain about nationalization. Lyndon Johnson settled that fight a long time ago." (Can You Nationalize a Government Program?)

Argument: Having the government make all federal student loans directly will substantially increase the national debt.

Our Response: "When a lender makes a loan on behalf of the government in the FFEL program, the federal government is on the hook for 97 percent of the principal of the loan. So, essentially the risks and obligations to the taxpayer of both of those [FFEL and DL) loans are nearly identical. To suggest that somehow we don't have an increase to the national debt when the bank makes a loan that taxpayers are on the hook for is totally absurd."

"It's also important to remember in this debate that, according to the Office of Management and Budget, the Congressional Budget Office, and a lot of budget experts, the Direct Loan program is cheaper and, therefore, has less of an impact on the national debt." (Debunking Student Loan Industry Myths)

Argument: If the legislation is enacted and student loans are made entirely through the Direct Loan program, students will lose the fundamental right available in FFEL to choose their own lenders.

Our Response: "If there is anything that we learned from the "pay for play" student loan scandal, it is how little choice borrowers in the FFEL program actually have. Don't forget that in 2007, the Education Department found that one lender made at least 80 percent of students' federal loans at 921 participating colleges. That same year, the research firm Student Marketmeasure reported that 1,412 FFEL schools had one loan provider that made 80 percent of their students' federal loans, with 531 of those colleges recommending only a single lender to their students. What kind of a choice is that?"

"Perhaps the most hollow part of the ‘borrower choice' argument is the fact that a lender making FFEL loans is not allowed under program rules to significantly differentiate its product from other FFEL lenders. This is because all lenders must disperse Stafford loans and PLUS loans that have the same terms for borrowers, with only some room to offer slightly more generous interest rates than those required by law. Given that the loans are the same, why is borrower choice so important? It's really only important if you're a student loan company." (More Scare Tactics from the Student Loan Industry and Friends)

Argument: Using savings to end FFEL to increase spending on Pell Grants, rather than lowering the cost of borrowing for students, represents a redistribution of wealth that will ultimately harm middle-income students.

Our Response: "Given that the primary goal of federal financial aid policy is to increase access to college, it makes far more sense for the government to use the savings from lender subsidies to boost spending on Pell Grants than to "lower the costs of "federal student loans further."

"We haven't seen any evidence to suggest that reducing" the costs of federal "loans would have an impact on the college-going decisions of financially needy students."

"Besides, the proposals under consideration do seek to ease students' debt burden by making low-cost federal Perkins Loans more widely available so that students can avoid taking out more expensive and risky private loans." (Playing the Class Warfare Card)

Argument: Republicans should oppose the legislation because it "kills jobs and greatly expands the federal government's control of the education loan market.

Our Response: "The two federal student loan delivery systems (FFEL and Direct Loans) are part of the same government program that by law must provide loans with virtually identical terms to student borrowers. A move to 100 percent direct lending would certainly mean that fewer workers would be needed to run the program, even though all eligible students would continue to receive the same government loans they did before the change. In other words, fewer resources would be devoted to administering the same benefits provided by a government program."

"One would think that Congressional Republicans would champion this lower-cost, smaller-government approach. But this is not your father's (or your grandfather's) Republican Party...In their support for the FFEL program, it appears that House Republicans want big government too -- they just want to dress it up as private enterprise. Under FFEL, the federal government sets the terms of the loans while taxpayers insure private lenders against 100 percent of the interest rate risk, subsidize administrative costs, and cover all but a sliver of default losses on loans. How exactly does that arrangement make for smaller government than if the same loan were made directly from the Treasury?" (House Republicans Confused on Student Loan Debate)

Hopefully, we have added clarity to a debate that has been obscured by the loan industry's disingenuous claims.

Stay tuned tomorrow for more coverage of House action on this important legislation.

House Republicans Confused on Student Loan Debate

Jason Delisle — Tue, 15 Sep 2009 14:40:00 -0400

How many employees does it take to run a government program? Conservative ideology teaches that the correct answer is, "as few as possible." Can the federal government create jobs? Conservative ideology teaches that the correct answer is, "No, because the federal government must first tax someone, thereby destroying jobs, to generate the revenue that will pay the salaries of government employees." Great conservative politicians and legislators of the past, such as Barry Goldwater (pictured at far right), had these basic tenets running through their veins. Yet these principles appear to be all but lost on today's Republican party when it comes to the issue of federal student loan policy.

Republicans on Capitol Hill are grasping for good public policy arguments to fight legislation now under consideration in the House of Representatives that would eliminate the Federal Family Education Loan program (FFEL), which subsidizes private lenders to make government-backed loans, and replace it with an expansion of the Direct Loan program. But a recent memo on the student loan reform bill from the House Republican Conference (a sort of GOP messaging machine) reveals a party deeply confused about its core principles -- and about how the federal student loan program works. The memo tells House Republicans to oppose a move to 100 percent direct lending because it "kills jobs and greatly expands the federal government's control of the education loan market." Come again?

The two federal student loan delivery systems (FFEL and Direct Loans) are part of the same government program that by law must provide loans with virtually identical terms to student borrowers. A move to 100 percent direct lending would certainly mean that fewer workers would be needed to run the program, even though all eligible students would continue to receive the same government loans they did before the change. In other words, fewer resources would be devoted to administering the same benefits provided by a government program.

One would think that Congressional Republicans would champion this lower-cost, smaller-government approach. But this is not your father's (or your grandfather's) Republican Party. It appears that House Republicans believe that the more resources and jobs devoted to FFEL the better. Their rationale is that these resources and jobs are part of the "private sector" because they are employed by private entities, like Nelnet or Sallie Mae. Thus, a move to 100 percent direct lending makes the federal government bigger and destroys "private sector" jobs associated with administering FFEL.

Deference to the private market versus government activity is a worthy conservative principle. But Republican arguments in favor of FFEL turn this tenet into an embarrassing sham. When private entities are paid under no-bid formulas to run a government entitlement program as they are in the FFEL program, it's quite a stretch to claim the jobs entailed are "private sector" jobs. But the sham doesn't end there.

In their support for the FFEL program, it appears that House Republicans want big government too -- they just want to dress it up as private enterprise. Under FFEL, the federal government sets the terms of the loans while taxpayers insure private lenders against 100 percent of the interest rate risk, subsidize administrative costs, and cover all but a sliver of default losses on loans. How exactly does that arrangement make for smaller government than if the same loan were made directly from the Treasury?

Conservatives watching the House debate student loan reform this week should be saddened to watch the Republican party make a mockery of their small-government ethos and support for private enterprise. The Republicans could certainly use a leader like Barry Goldwater to remind them what they stand for.

The author is a former Republican Congressional Staffer.