Congress Blinks in Game of Chicken with Lenders

On Monday, the U.S. House of Representatives gave in to pressure from the student lending community by agreeing to a one year postponement of the pilot PLUS loan auction that was slated to begin just under two weeks from now. The Senate is expected to follow suit.

Auction opponents are on the verge of winning the delay because they have threatened to not participate and have made claims that the competitive bidding process rests on too much uncertainty for all involved. We understand why these claims would resonate with lawmakers, but the facts of the auction process simply don't bear them out. Instead, the fear and panic raised by the auction's detractors resulted in an unnecessary game of chicken between lenders and Congress. It's clear who blinked first.

The House included the delay as part of legislation it approved on Monday that aims to make mostly technical corrections to legislation it passed last summer reauthorizing the Higher Education Act. The bill is still waiting on Senate action before it can head to President Obama's desk, though little opposition is expected.

Whispering in the Ears of Aid Administrators

Warning,  Arkansas Congressional delegation, you are about to start hearing from financial aid administrators in your state upset about President Obama's proposal to eliminate the Federal Family Education Loan (FFEL) program. If you listen carefully though, you'll notice that the complaints sound awfully alike. That's because they come straight from talking points provided by the Student Loan Guarantee Foundation of Arkansas (SLGFA), the state guaranty agency.

On Tuesday, the Arkansas agency sent out a special alert to college financial aid administrators in the state entitled "School Support Needed to Help the Federal Family Education Loan Program." The guarantor warns the college officials that urgent action is needed. "The budget process is moving very quickly, and it is critical that your Congressional members hear from you this week," the alert states. "If you do not have time to write a letter, please call and express your views" related to "the merits and benefits of FFELP."

But just in case the aid administrators who receive this message can't think of anything good to say about the FFEL program on their own, the Arkansas agency helpfully provides them with "information points that will help you craft your message." Among other things, the aid administrators are asked to tout "local services offered by SLGFA and its trading partners." And for those aid officers who are not sure who to contact, the guarantor is considerate enough to provide "the name, e-mail address, and telephone number for each of the education aides working for your Congressional delegation."

Please Don't Make Us Bid on PLUS Loans!

Are private student lenders and their allies in the financial aid world thankful for the credit crunch? If they can use the market turmoil as an excuse to torpedo the PLUS loan auction set to begin this year, they may very well be.

The student loan industry and their friends in the national and state associations representing financial aid administrators are calling on Congress and the Obama Administration to postpone or eliminate the new pilot auction program, arguing that current financial market disruptions would make it unworkable. They also argue that the program, which would use market forces to set student loan subsidy rates for lenders making federal PLUS loans to parents, won't reduce costs for the government.

Policymakers should bear in mind a few key points when considering the loan industry's latest cries.

NASFAA's Misplaced Priorities

The National Association of Student Financial Aid Administrators (NASFAA) is at it again -- raising panic levels to pressure policymakers to provide a massive bailout of the student loan industry. This time, the group's focus is on ensuring that lenders and colleges can continue to offer expensive private loans to high-risk borrowers.

On Monday, NASFAA President and CEO Phillip Day (pictured) sent a letter to both Treasury Secretary Henry Paulson and Education Secretary Margaret Spellings asking for their assurances that they will use a portion of the $700 billion bailout package to provide liquidity to companies that make private student loans. Praising the efforts Congress and the Bush administration have made to assist lenders that participate in the Federal Family Education Loan (FFEL) program, Day urged Paulson and Spellings to take "similar effective actions to ensure credit financing is available for those private educational loan borrowers that need it in order to pay postsecondary education expenses."

"Surely," he continued, "private education loans must be considered ‘troubled loan assets' and action is needed to correct this marketplace dysfunction." [The bailout package Congress approved in October gives the Treasury Secretary the authority to purchase "troubled assets."]

We agree with Day that private student loans are troubled loan assets -- for many of the financially needy borrowers who take them out. As we've written repeatedly, private loans are the most toxic form of student debt available with their high variable interest rates and lack of basic consumer protections. As with subprime mortgages, the lowest income borrowers are often stuck with the highest rates and the worst terms on these loans. And borrowers who have difficulty repaying the loans often have no way out - as private student loan providers have been uniformly inflexible in offering repayment relief. In addition, federal law makes it extremely difficult for financially distressed borrowers to discharge private loans in bankruptcy.

Direct Lending On the Rise

Here's something that we never could have predicted: President Bush is leaving the federal Direct Student Loan program in a stronger position than he found it.

Back in January 2001 few student-aid observers thought that Direct Lending, which had been championed by the Clinton administration and Congressional Democrats, would survive the Bush presidency. Some loan industry lobbyists were so confident of the program's demise that they actually advised the administration to show restraint. "It would be foolish for the Bush administration to try to eliminate direct lending," Jeff Andrade, an advocate of the Federal Family Education Loan (FFEL) program, told The Chronicle of Higher Education shortly before Bush was sworn in. "The program is withering on the vine on its own." [Andrade soon after received a plum assignment at the U.S. Department of Education.]

Now, nearly eight years later, the Direct Loan program's fortunes are on the rise. In the wake of the credit crunch, the program's volume has increased by nearly 50 percent this year, according to the Education Department. Roughly 400 schools have switched to Direct Lending from the competing Federal Family Education Loan (FFEL) program over the last 12 months, bringing the total number of schools offering Direct Loans to about 1,370. If the program's growth continues at its current pace, Direct Lending will overtake the FFEL program for the first time in the program's history. [An additional irony is that, as a result of the credit crunch, the FFEL program is looking more and more like direct lending -- with the federal government providing federal capital and liquidity to struggling lenders to make federal loans.]

A Convenient Scapegoat for the Loan Industry

The Bush administration and lawmakers from both political parties are continuing to look for ways to help struggling student loan providers. While students haven't experienced any problems obtaining federal loans, lenders are still having trouble coping with the turmoil in the financial markets.

Before providing any additional help, however, policymakers should take a step back and consider how we got into this mess. For years, student loan providers have relied on the asset-backed securities market to finance their loans. That market has become dysfunctional and now most lenders are only able to continue making Federal Family Education Loans with liquidity provided by the government.

The student loan industry is not completely blameless for the breakdown of investor confidence in student loans. While the greatest damage was done by mortgage lenders securitizing faulty subprime mortgage loans, student loan companies dumped plenty of high-risk private loans onto the marketplace (sometimes bundled with safer federal loans), knowing full well that some of this debt was likely to go into default.

While many lenders have gratefully accepted the government's help in financing their loans, they still don't want to shoulder any responsibility for their actions. Instead, they have identified a convenient scapegoat for their problems -- the sharp cuts Congress made to lender subsidies last year. As we've noted before, the loan industry has repeatedly tried to use the panic created by the credit crunch to pressure lawmakers into revisiting the subsidy cuts.

NASFAA's Clouded View

By Ben Miller and Stephen Burd

As individuals on the "‘front lines" of the financial aid process, financial aid administrators offer an important perspective on the credit crunch's daily effects on student loan availability. As such, the results of a recent survey that the National Association of Student Financial Aid Administrators conducted of its members provide some interesting ground-level impressions of the credit crunch. Unfortunately, this viewpoint is almost entirely clouded by the 30,000-foot spin the organization's leadership has put on it. Needless to say, the association's close ties to the student loan industry remain firmly evident.

On its face, the survey suggests that immediate federal loan availability concerns have been largely satisfied, though worries remain about discriminatory lender practices (i.e. banks refusing to lend to students at community colleges and for-profit trade schools) and the long-term fiscal health of the student-loan market. The vast majority of respondents, for example, said actions that Congress and the Bush administration have taken in recent months have "eased the student loan crunch problem" for now. And only a relatively small proportion of aid administrators (about 25 percent of those surveyed) are worried enough that they have put contingency plans in place to prevent any disruptions in loan availability for their students.

Higher Ed Watch Investigation: Student Loan Companies Infiltrate College Financial Aid Associations

We have long been concerned about the close ties between the student loan industry and the National Association of Student Financial Aid Administrators (NASFAA), an organization that lobbies on behalf of college aid officials. These ties have been so strong in recent years that the group's policy positions on student loans have more often than not mirrored those of the Consumer Bankers Association and Sallie Mae.

NASFAA's leaders deny that lenders have influence over the organization's policy positions. In arguing this point, they often note -- as the group's former president Dallas Martin did in an interview with The Wall Street Journal last year -- that the association prohibits loan industry officials from serving on its national board or voting "on policy and membership issues."

What they fail to mention, however, is that these rules do not apply to the organization's state affiliates and regional associations. In fact, by most accounts, these groups depend heavily on student loan providers for both leadership and financing.

NASFAA's New Chief Is No Aid Expert

Shortly after being named the new president of the National Association of Student Financial Aid Administrators, Philip Day said in an interview that he was not interested in becoming a student aid expert.

"One of the questions I got in my interview is, "how long do you think it will take you to get up to level of technical speed?'" Day told The Chronicle of Higher Education. "I said, 'I hope never.' Because I think that's not what this institution needs now. What they need is somebody who can advocate and focus on issues at the 10-to 15,000-foot level."

Judging from a more recent interview that Day gave Higher Education Washington Inc., a publication owned and run by a top student loan industry lobbyist, NASFAA's new chief seems to be succeeding. As we noted yesterday, the interview shows that Day is not only ill-informed, but also, in spite of last year's revelations in the student loan "pay for play" scandal, NASFAA has not changed its stripes. The views that Day expresses on federal student loans in general, and the Direct Student Loan Program in particular, are confused and misleading, and reflect a strong bias in favor of the Federal Family Education Loan (FFEL) program.

The Honeymoon is Over

Up until now, we've been willing to give Philip Day the benefit of the doubt.

In March, Day, the former chancellor at the City College of San Francisco, became the president of the National Association of Student Financial Aid Administrators (NASFAA), a group with such strong ties to the student loan industry that in recent years its policy positions have closely mirrored those of the Consumer Bankers Association and Sallie Mae.

At Higher Ed Watch, we have been critical of NASFAA in the past. We were hopeful, however, that the organization's first presidential change in its 32 year history -- coming on the heels of reforms imposed on NASFAA by New York State Attorney General Andrew Cuomo that cut into the financial support the group receives from loan providers -- would set the association on a new track.

We were especially encouraged by statements Day made shortly after accepting the job. In January, he told The Chronicle of Higher Education that NASFAA needed to "reassess" its relationship with lenders. "It's something I don't feel 100 percent comfortable with," he stated. Amen to that.