Sallie Mae

According to news reports today, Senate Democratic leaders are considering allowing a landmark student loan reform bill die. The would-be killers: a handful of Senate Democrats who apparently care more about protecting the subsidies of powerful student loan companies than about helping low-income and working class families afford to send their children to college.

Make no mistake, if this bill dies, the victims will be those students who do not have the financial wherewithal to afford to go to college without the substantial boost in Pell Grants that the legislation promises. Given the mammoth budget deficits this country faces, this just may be the last chance in a long time for Congress to make a significant investment in the program. In fact, if the bill collapses, many Pell Grant recipients may actually see reductions in their grants. Without the mandatory funding that the student loan reform bill provides, it will be extremely difficult for Congress to keep the fiscal year 2010 maximum award of $5,550 in place in the coming years.

Correct us if we are wrong, but aren’t there millions of financially needy students in Arkansas, Delaware, Nebraska, North Dakota, and Virginia – the states the bill’s detractors hail from – who could sorely use the additional Pell Grant funds to make their college dreams come true? Unfortunately, these students and their families can’t afford to hire powerhouse Democratic lobbyists like Tony Podesta and former Deputy Attorney General Jamie Gorelick to press their case on Capitol Hill, as student loan giant Sallie Mae has done. Nor are they able to shower lawmakers with hefty campaign contributions or make sizeable contributions to Members’ personal charities or pet causes.

At Higher Ed Watch, we value the comments we receive from readers -- even the really angry ones from student loan industry officials that accuse us of being “socialists” for wanting to end a government program. We understand that people on both sides of the student loan reform debate are passionate in their views, and we enjoy fostering vigorous debate on this subject.

Occasionally, however, we receive comments that are so misinformed they demand a response. Take, for example, one we received yesterday in response to a post we wrote about how Sallie Mae uses the relationships it has forged with colleges through the Federal Family Education Loan (FFEL) program to cross-sell its more expensive private loans to students. “I am not a supporter of Sallie Mae by any means, but you have provided incorrect information,” the commenter wrote. “Financial Aid offices CANNOT recommend any lender over another when providing information for Stafford or private loans as it is against federal regulations.”

We found this comment bewildering because there is absolutely no prohibition in federal law or regulations against colleges recommending lenders to students. Most schools participating in FFEL do, in fact, recommend favored lenders to students by providing them with a list of “preferred lenders.”

Pity Sallie Mae, it is so misunderstood. The student loan giant says it has spent millions of dollars on high-priced lobbyists and showered lawmakers with hundreds of thousands of dollars of campaign contributions over the last year not to defeat President Obama’s proposal to overhaul the federal student loan system but to enhance it.

Responding to a tongue-lashing from Education Secretary Arne Duncan yesterday, the student loan giant set out to set the record straight. “Sallie Mae is not lobbying for subsidies or to prevent student loan reform,” the company wrote in a news release. “We have supported the Administration’s call for student loan reform since day one. The company advocates for reform that better serves students and saves private sector jobs.”

Sallie Mae is, of course, referring to the “Student Loan Community Proposal” that it has championed as an alternative to President Obama’s plan to eliminate the Federal Family Education Loan (FFEL) program. However, as we have said before, this proposal, which would allow private lenders to continue to originate federal student loans and collect fees [or should we say “subsidies?"] for doing so, does not represent real reform. On the contrary, it aims to keep as much of the status quo in place as possible.

As the debate heats up once again in Washington, we thought that now would be a good time to revisit an earlier post, in which we laid out five reasons that Sallie Mae’s proposal doesn’t live up to its billing. Keep these in mind the next time the loan company tries to burnish its reputation as a reformer.

When is a government subsidy for private student loan companies not a subsidy? Apparently when Sallie Mae and the rest of the student loan industry call it a “fee” instead.

Sallie Mae officials tried to make this distinction in a Wall Street Journal article on the Obama Administration’s plan to eliminate the Federal Family Education Loan (FFEL) program. Jack Remondi, the company’s chief financial officer, told the Journal that there was not “a single bit of evidence” that it was seeking to preserve the subsidy system that the president’s proposal would do away with. In fact, the company supports a switch to 100 percent direct lending and has been frantically lobbying Congress to adopt its proposal. But there is, of course, a catch. Sallie Mae’s proposal includes billions of dollars in government subsidies for private lenders layered on top of the Direct Loan program and renamed “fees.”

We are sorry to report that legislation that would eliminate the Federal Family Education Loan (FFEL) program remains stalled in the Senate, as debate on the health-care overhaul bill continues to drag on and on. Unfortunately, the delay appears to be working to the student loan industry’s advantage. Recent news media accounts indicate that some moderate Senate Democrats are flirting with an alternative “reform” proposal that industry officials have been shopping around Capitol Hill.

But no matter how the loan industry spins it, the “Student Loan Community Proposal” does not represent real reform. On the contrary, it aims to keep as much of the status quo in place as possible. As we said yesterday, loan industry officials ultimately want to be well-positioned should the political tide shift back in their favor.

In their fight against legislation that would end the Federal Family Education Loan (FFEL) program, student loan industry officials have one overriding goal: to persuade lawmakers to keep as much of the current program in place until the political winds in Washington shift back in their favor. In adopting this approach, industry officials are essentially going back to the playbook that worked so well for them in the early 1990s, the last time the FFEL program faced possible elimination.

In 1993, a new, popular Democratic president came to power and quickly made reforming the federal student loan program a top priority. Within weeks of taking office, President Bill Clinton called on Congress to eliminate the FFEL program and replace it with a new program in which the U.S. Department of Education would provide federal loans directly to students through their colleges. The plan was met with fierce resistance from the student loan industry and its allies in Congress. Eventually, the Clinton administration and Democratic Congressional leaders bowed to the pressure and agreed to phase the program in gradually.

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.

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.

• Only 32% of low-income families (those making under $35,000 a year) have saved for college. By contrast, 62% of all families have saved for higher education.
• The current economy is impacting college savings behaviors. For example, 36% of low-income families are saving less for college than before. Only 5% are saving more.
• Families making under $50,000 who are currently saving for college put away, on average, larger amounts than those making between $50,000 and $150,000.
• Families making under $50,000 annually save 7.5% of their income for college, on average. By comparison, the average college savings rate among all income levels is 3.6%.
• In order to reach estimated "savings goals," low-income families need to save nearly 10% of annual income until a child reaches college. On the other hand, families of all income levels only need to save 5.7% of annual income to reach their savings goals.
• 529 college savings plans are the third most popular savings vehicle for college - with one-third of all families using them.
• Only 4% of low-income families consider themselves "very familiar" with 529 college savings plans. A whopping 75% were "not at all familiar."

What are the key takeaways from this survey? And how can we apply these findings towards enlightened federal policy?

On Monday, a federal court in Virginia unsealed a whistleblower lawsuit filed by Jon Oberg, the U.S. Department of Education researcher who uncovered the 9.5 student loan scandal, against 10 student loan companies that participated in the scheme. The lawsuit, which Oberg filed in 2007 under the federal False Claims Act, seeks the return to the federal government of $1 billion in excess student loan subsidies these lenders improperly obtained.

The roots of the 9.5 student loan case go back to the 1980s when Congress guaranteed non-profit lenders, which use tax-exempt bonds to finance their loans, a minimum rate of return of 9.5 percent on federal student loans made with these bonds. As interest rates on all other student loans fell in the 1990s, policymakers became concerned that these nonprofit student loan providers were making a killing. So in 1993, Congress rescinded that policy, but grandfathered in loans made from the old bonds, believing that the volume of 9.5 loans would decline as they were paid off and the bonds retired.

Instead, beginning in 2002, a small group of lenders devised a strategy to aggressively grow the volume of loans that they claimed were eligible for the 9.5 guarantee. This was a goldmine for lenders in the existing low interest rate environment (at the time, the borrower interest rate on regular loans hovered around 3.5 percent.) They accomplished this scheme by transferring loans that qualified for the 9.5 subsidy payment to other financing vehicles and recycling the proceeds into new loans that they claimed were then eligible for the subsidy. The lenders repeated this process over and over again.