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Lenders Speak Out Against Cuts

Lenders Speak Out Against Cuts
December 2, 2005

A coalition of bankers and other parties in the student loan industry wrote Republican Congressional leaders Wednesday to "strenuously oppose" proposed cuts to the federal student loan programs, which they said "threaten our ability to fulfill the critical national need of providing affordable access to postsecondary education."

The letter adds: "Cuts this deep will hurt borrowers and lenders alike. Lenders will be forced to curtail borrower benefits, will have trouble maintaining high-level service, and will have more difficulty financing student lending."

Congress has been working for months on legislation, part of the "budget reconciliation" process, to squeeze savings from mandatory federal programs to reduce the budget deficit, offset the cost of tax cuts, and, as of this fall, raise money to help rebuild the Gulf Coast from hurricane damage.

Both the Senate and the House of Representatives began with the goal (as set out in the budget blueprint Congress passed in February) of producing $35 billion in savings from mandatory programs, and both chambers tried to wring between a quarter and a third of that money from the government's two student loan programs. They have proposed doing that through a mix of cuts in subsidies to lenders and increases in interest rates and other costs to students and families, though exactly which group is paying more has been a subject of intense debate and dueling reports.

This fall, House leaders upped the ante, raising the target for their overall budget savings to $50 billion and ratcheting up to $14.3 billion the amount they sought to squeeze from the loan programs. The House passed legislation (HR 4241) to make those cuts this month by one vote.

Groups that represent students and colleges and universities have lobbied loud and hard against the proposed cuts (with the slogan "Stop the Raid on Student Aid"), arguing (1) that the federal government should not do anything to increase costs to students at a time of rising tuitions and (2) that any savings produced from the student loan programs should be used to bolster access to higher education, not pay for tax cuts or hurricane relief. 

The banks, guarantee agencies and other financial institutions that participate in and profit from the guaranteed student loan program have appeared to remain largely silent throughout the process, even though Republican leaders have insisted that lenders (rather than students) are bearing the brunt of the cuts.

Why would the lenders be so compliant if their ox is being so badly gored? The conventional wisdom is that they knew some cuts were likely no matter what, and that Rep. John A. Boehner (R-Ohio), who heads the House Education and the Workforce Committee and is a friend to the lenders, had urged them not to lobby against the first layer of cuts approved as part of legislation to extend the Higher Education Act (which would have cut about $9 billion from the loan programs) by vowing to protect them from worse ones. 

But when House Republicans decided to raise their budget target to $50 billion and slice another $5 billion or so from the loan programs, some lenders began pushing industry leaders to speak out against the cuts. They quietly sent one letter to all House Republicans in mid-October, and another to the same group in early November. But still, the impression was that the lenders were staying on the sidelines.

The letter released Wednesday "was prompted by concern that cuts are excessive in the House and Senate bills, and that if lenders do not speak up, then the mistaken impression could be left that these cuts are OK" with us, said John Dean, president of the Consumer Bankers Association, which co-signed the letter.

The letter -- which was also sent by the Education Finance Council, National Council of Higher Education Loan Programs, Nelnet, Sallie Mae, and the Student Loan Servicing Alliance -- echoes the themes of the earlier ones. Although it vaguely repeats threats that changes that make student loans less profitable could drive lenders from the guaranteed loan program, the letter mostly focuses on the extent to which disinvestment in student aid will hurt higher education and American competitiveness.

"We understand that the federal budget deficit must be reduced," the groups wrote. "However, our country’s future depends on an educated workforce, which in turn must be able to finance higher education. Cutting federal support for student loans, the most efficient way to finance higher education for the federal taxpayer, would reduce our ability to compete in the global marketplace."

The letter urges lawmakers to keep cuts to the loan programs "to an absolute minimum."

What that might mean in practical terms is unclear. With the Senate having passed a bill that would cut $35 billion (but direct nearly $8 billion in savings from loan programs to create two new financial aid programs for needy students and those who specialize in math and science), and the House having narrowly passed a bill that would cut $50 billion and shift all savings from the loan programs to deficit reduction and other purposes, lawmakers trying to draft a compromise between the two versions have their hands full.

 

 

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