Ten Things Americans Should Know About Student Loans
Courtesy of the House Education and Labor Committee Republicans
The countdown is on. The White House and Congressional Democrats are readying a series of complex legislative maneuvers they hope will secure final passage of a wildly unpopular health care scheme comprised of thousands of pages of legalese, millions of lost jobs, billions of dollars in new taxes, and trillions of dollars in total cost. Yet unbeknownst to many Americans, the health care bill will also dramatically reshape the way students pay for college. To help set the record straight, here are 10 things every American should know about the government takeover of student loans.
It's a government takeover. Democrats are planning to eliminate the Federal Family Education Loan (FFEL) program, which has leveraged hundreds of billions of dollars in private sector capital since 1965 to help Americans pay for college. They will replace it with 100 percent Direct Lending, in which the federal government originates and oversees every single college loan in the country. Last year, there were more than 1,200 active lenders in the FFEL program. Contrast that with the Department of Education's much-heralded announcement that it had contracted with a total of four servicers for its Direct Loan program.
It drives up public debt. Until the global credit markets collapsed, the FFEL program was financed entirely with private capital. Although Congress temporarily allowed federal purchase agreements to keep loans flowing, even in today's bleak economy a portion of the FFEL program is financed in the private capital markets. And when the economy returns, private capital can be restored. In contrast, the Direct Loan program relies fully on borrowing from - and by - the U.S. Treasury to finance approximately $100 billion (and rising) in borrowing each year. Put another way, our nation's college students will be forced to rely on China and other foreign creditors to finance their higher education.
It "saves" less than you think. Last year, Democrats said their plan saved $87 billion. Earlier this month, the estimates were revised - now the Congressional Budget Office (CBO) tells us it saves closer to $68 billion. But that didn't take into account billions in new "discretionary" costs on the other side of the federal ledger, which reduce savings to $62 billion. Except - hold on a minute - when the cost of market risk and the present value of future administrative costs are counted, the "savings" actually fall to $40 billion. Yet recent news reports indicate Democrats plan to spend at least $50 billion to expand the Pell Grant program. $40 billion in so-called savings (more on that later) and $50 billion or more in new spending. So much for deficit reduction.
Colleges prefer the FFEL program. Even at its peak, the Direct Loan program never captured more than roughly one-third of the student loan market. Colleges and universities overwhelmingly preferred to participate in the FFEL program, which offers superior customer service, competitive benefits for students, and technological advancements and support. Even today, with Democrats exerting tremendous pressure on colleges to switch to the government-run Direct Loan program, roughly 4,000 colleges remain in the FFEL program.
It eliminates benefits for students. One of the great advantages of the FFEL program is the value-added benefits it brings to students. Financial aid providers in the FFEL program offer localized college planning services, financial aid application assistance, financial literacy education, default aversion, and a host of other benefits and services. Democrats have proposed a modest national initiative to try to pay other entities to replace the more personal benefits and services they are eliminating - why not just keep the FFEL program and all its benefits in place?
Schools can't afford it. Desperately trying to squeeze every penny from the FFEL financial aid program, Democrats plan to force schools into Direct Lending by July 1, 2010, less than four months from today. Yet making the transition will cost thousands of dollars and require significant changes to infrastructure, software, and staffing for many colleges and universities. Many schools have warned they cannot afford the financial or personnel cost in time for the looming deadline.
The government is profiting on the backs of students. One of the great myths about eliminating the FFEL program is that its "savings" are generated by reducing subsidies to lenders. In fact, a significant portion of the so-called savings is actually government "earnings" in the Direct Loan program. The government's cost of funds is generally several percentage points lower than the rate at which it lends to students - meaning the government earns a profit on each Direct Loan, which will be diverted to new spending elsewhere - possibly, to finance the government takeover of health care.
It's a bait and switch. For close to a year, Democrats have been advocating elimination of the FFEL program with promises that they would invest approximately $80 billion in a host of other education initiatives that range from early childhood education to school construction to curriculum development to Pell grants. While fiscal conservatives have always found this massive entitlement spending expansion to be a dubious plan for a bill designed to reduce the deficit, these spending promises were used to lure support and votes in favor of the plan. Now, at the eleventh hour, most of the spending is on the cutting room floor and reports indicate Democrats plan to use at least a portion of the "savings" to pay for their health care plans.
There is a zero cost alternative that protects students and schools. In 2008, Congress enacted the Ensuring Continued Access to Student Loans Act, a bipartisan bill to temporarily shore up the student loan financial markets in the face of a global credit market collapse. Thanks to this legislation, not a single student has been denied a federal loan because of economic uncertainty. Importantly, the plan hasn't cost taxpayers a penny. Congress could extend these bipartisan reforms immediately and give students and schools the certainty that loans will be available - with the innovation, choice, and competition of the FFEL program - for the upcoming school year. Instead, they remain intent on their government takeover, stubbornly refusing to extend this zero-cost alternative, even as financial aid officers are assembling financial aid packages and heading into the busiest time of their year.
Did we mention it's a government takeover? President Obama's Chief of Staff Rahm Emanuel famously decreed, "you never want a serious crisis to go to waste." Democrats are using the global credit crisis to justify a government takeover they've had their sights set on for nearly two decades. President Bill Clinton first conceived of 100 percent Direct Lending in 1993, and Democrats have worked hard since that time to crowd out the private sector and expand the federal bureaucracy. Now, they're seizing on the economic crisis as an opportunity 17 years in the making to finally fulfill their wishes for a government monopoly over how students and families pay for college.