Health Education Assistance Loan Program not a flop

GAO has touted the success of the HEAL program in benefiting from competitive bidding to improve borrower terms and conditions and reduce taxpayer costs:

“Evidence from other federal auction programs suggests that origination rights auctions could produce a net saving to the federal government. In the Health Education Assistance Loan (HEAL) program, under which lenders bid for the right to originate student loans to students of the health professions, the markup in excess of the 91-day Treasury bill rate that the federal government paid the largest lender during the repayment period was CUT IN HALF between 1993 and 1998. [Emphasis added.] The Federal Communications Commission’s (FCC) auctions of wireless spectra have yielded revenues exceeding their costs.

“The number of HEAL bidders declined during the last 4 years of the program. (These are the only years for which we were able to obtain comparable data.) However, this decline may have stemmed from lenders withdrawing from the auctions after the Congress decided to end the program. Moreover, the number of lenders receiving loan origination rights did not fall continuously. There were four or five large HEAL lenders in the last few years of the program until the very last year. Furthermore, lenders entered and re-entered rather than dropping out permanently after losing at auction.”http://www.gao.gov/new.items/d0284sp.pdf

Vermont Student Assistance Corp. was actually one of the HEAL winning bidders:

“A new lender contract cycle will begin July 1, 1997 and extend for 12 months through June 30, 1998. Four lenders will participate in the HEAL program during this period — Pennsylvania Higher Education Assistance Agency, Mellon Bank, Star Bank (as trustee for Brazos), and Vermont Student Assistance Corporation. Rhode Island Higher Education Assistance Authority dropped out since we released our March 13, 1997 policy memorandum first announcing participating lenders.” http://bhpr.hrsa.gov/dsa/heal_policy/FY97/fy97L05.htm

The main problem with HEAL from the schools’ viewpoint was that, unlike FFELP, HEAL was not a mandatory program and was heavily dependent on Congress and the President successfully enacting appropriations well before the beginning of the federal fiscal year — something that has been quite rare over the past 35 years. This created a cash flow timing challenge for schools, for example beginning the academic year Sept. 1, when appropriations are enacted Oct. 10. Pell, although not a mandatory program, gets around this timing problem through forward funding.

CraigieH, at 7:40 am EDT on June 28, 2007

Bad policy

While I can appreciate the Congress’s intentions, the auction model is simply just a bad policy. It will force the thousand or so small lenders in small towns across the country, some who provide loans to local kids as a service and others who might use it for the purpose of generating a marginal slice of income, out because it will be a hassle and they won’t be able to compete on price. The FFEL industry’s profitability will come from gobbling up as much of the market as possible (to extract scale economies) and as most respectable pundits suggest, it will throttle servicing. In several years we’ll have the Direct Loan programs and a FFEL industry that is little more than a duopoly managed by Sallie Mae (the people who most current federal loan legislation is designed to specifically antagonize) and maybe Citibank. Where’s the competition in that? Won’t this create exactly what the majority DOESN’T want? No, it isn’t.

The worst part of it all, is that it scuttles competition between lenders for students and replaces it with competition between lenders for the government’s graces. My understanding of the Senate proposal is that lenders would bid for the right to all loans at a particular school (or block of schools). Suppose John Doe enrolls at Podunk State University. Today he can choose whatever lender he’d like for his student loans. He has the freedom to shop around (please no comments here on preferred lender lists...it’s a hypothetical) and in some ways it is the “Lending Tree” model since lenders compete for students. Under the proposed auction scheme, if Wells Fargo won the right to the loans at Podunk then Mr. Doe will have no choice but to take THEIR loans. Sure it provides savings to the government since they pay out at a lower rate but the price is students and their families losing their freedom to choose. That, dear legislators, is market competition. Ironically, there are some people out there who stump for the “lending tree” option but puzzlingly also lobby for the loan auction model. I’m sorry but you can’t have it both ways.

There are probably another half-dozen solid arguments for why this is such a bad policy (including managing the logistics of annual or even bi-annual auctions for nearly 4,000+ schools) but space is short. And B.J. the fact of the matter is, the auction won’t change the rates students are charged, just what the government has to pay lenders to participate. Yes, the theory is that these savings will be churned into other financial savings to some students but history has shown that that doesn’t always turn out to be the case.

D.C. Observer, at 8:50 am EDT on June 28, 2007

Nope.

The idea of an auction to fund a social program is ridiculous. What next: medicaid? foodstamps? HEAL— oh wait, been there, done that and that was a delight to administer...considering NO ONE in HHS knew where the loans were held for any of their borrowers... Banks that won the right to lend sold off the loans immediately after funding— no surprises there.I personally take exception to the idea that FA folks would be against it if their lenders change every few year— it’s not about me, it’s about student borrowers and utilizing taxpayer funds efficiently. Making more of a mess out of a system that I thought couldn’t get any messier or convoluted is absolute insanity. One lender/one payment.

Ann Doherty, at 8:55 am EDT on June 28, 2007

Increase competition in a way that helps the borrowers

I’m on the fence with this issue.

However: isn’t it obvious that the biggest barrier to competition in this industry is the fact that students can’t currently refinance their loans after consolidation?

Most people reading this don’t realize how badly the lenders act when their borrower is captive.

How sad is it that it actually took a liberal (Hillary Clinton) to propose refinancing rights for borrowers? Why haven’t republicans been pushing for this for the past decade?

I’ll tell you why: Sallie Mae, the CBA, Citibank and others have paid Congress off to protect their market from competition.

In the most recent Senate Bill, this right was, again, left out.

Are there any republican/free-market legislators out there listening?

Alan Collinge, Founder at Studentloanjustice.org, at 10:15 am EDT on June 28, 2007

Student savings...really?

It’s hard to get past all the grandstanding and hyperbole. But exaclty how much is a student going to save? Not the feds, ‘cause any promises to send federal savings on cutbacks to new or existing grant programs is just pillow talk at this point. There will still need to be budgets set and appropriations made so spare me the promises on bigger pell grants etc. I’m not even going to mention that the kids borrowing the money probably aren’t getting Pell grants anyway, oops just did.

My cynical view point is that some type of legislation will be passed, new regulations written up, new hearings on negotiated rule making will be held and we’ll end up with a system that is just as prone to abuse by unethical individuals. Just as the current sysem is. All the while college tuition rates will continute to outstrip inflation and college text book prices will also grow at about the same rate.

A part of my would like to beleive that something good will come from all of this...but then I remember the legislation on SMART and ACG grants. Thanks...those two students of ours really like thier $325. What a life saver that was.

Finaid cynic, at 11:40 am EDT on June 28, 2007

Same old, same old

I’ve said it before and I’ll say it again—the best way to “fix” the system is to eliminate all private lending interests and move 100% of Stafford loans to the Direct Lending program. The government would set interest rates at a level minimally required to cover administrative costs, while repayment would be contingent on income.

Chris Rasmussen, at 3:10 pm EDT on June 28, 2007

The Overselling of Auctions

As market-based mechanisms, auctions are being oversold.

The fact is that both the existing system and an auction system are both market-based to varying degrees. It’s not really true that an auction system is truly market-based—or even more market-based than the current system—since in an auction the ultimate consumer is a bystander.

In the proposed auction systems for PLUS loans, the interests, whims and preferences of the borrower are unrepresented entirely, because in the end the lenders selected in the auction may not have been ones borrowers would have selected if left to their druthers.

The government is taking that prerogative away from the consumer.

One example that demonstrates how borrowers are disenfranchised would be a state that has a strong state-based loan program or a popular regional financial institution that offers competitive terms and high quality service. Out-of-state or online lenders with deep pockets could decide to underbid them. The citizens of that state would now have to turn to institutions they may never have even heard of. Or had previously chosen not to borrow from.

If they have children who attend schools in separate states, the lack of choice is compounded. The borrower may be forced to deal with another, entirely different institution.

In other words, the government is the decider. Any market in which the government is the ultimate decider is no real market at all.

Under the current system, for all of its imperfections, no one deny that at FFELP schools it’s up to the individual borrower where he or she will get a federal student loan.

Kevin Bruns, at 5:45 pm EDT on June 28, 2007

The Problem is Savings for Whom

The idea of an auction for student loans is to harness the efficiencies of competition to drive lenders to find the cheapest price at which they are induced to enter the guaranteed student loan market. That’s the cheapest price possible for the government/taxpayer. But as D.C. Observer notes, this is at cross purposes with the current system, which uses competition to drive lenders to give the most benefits for schools or students. Setting aside the controversy over preferred lenders and other scandals, which can and will be fixed by regulation and statute, and making it clear that benefits of competition are to be aimed strictly at students, we can use the current market-based system to get the best price and services for the student. An auction-based system, by its nature, will require handing over small monopolies to lowest-bid lenders. They could be monopolies by state or by blocks of schools. What is the cheapest price for the taxpayer may not be the best deal for the student since they have no choice. They can’t bargain or go elsewhere so they may end up with higher prices (no rate cuts, no default fees covered) or worse service. So who should competition benefit – the taxpayer or the student?

Jennie Woo, Edfund, at 6:35 pm EDT on June 28, 2007

Your wish is already coming true. People already are not taking loans through the DL program. That’s why it continues to tank compared to FFELP. Central control by the government has been tried before. It never did work very well. The weak, financially inept, and those that cannot understand personal responsibility, will always opt for the perceived safe haven of big government.We’re born Republican, and we die Democrat.

Ralph Genco, at 10:45 am EDT on June 29, 2007

Savings for Whom?

Dr. Woo has published several excellent studies on student aid demographics but shows an apparent misunderstanding of the student loan market. The current system does not “use competition to drive lenders to give the most benefits for schools or students.” The current system wastes huge sums on marketing to red line “borrower benefits” to very few students. And there should not be any “benefits” for schools at all. If a school is shaky enough administratively to fall for a marketing pitch regarding a shiny new front-end interface, then that school should probably not be involved in federal student aid programs at all. The law requires schools to be administratively capable. They should not need gifts of software or lender/guarantor staff helping with filing in the financial aid office.

How can the current system “be fixed by regulation and statute"? You cannot change human nature. You are talking about thousands of investigators fanning out unannounced to 5000 institutions each year. Seems unwieldy. You need to set up a program structure that automatically makes illicit incentives difficult if not impossible to offer.

“Bargain or go elsewhere"? Again, this must be talking about schools, not students. Do you have any examples of a student who had lender A on one phone line and lender B on the other phone line and was able to bargain? Any examples of bargaining even with one lender on the phone? Can you get on the phone with Microsoft and bargain over the price of Office 2007? This is fantasy land. These are contracts of adhesion. The student has no bargaining power in an environment where only a handful of organizations already control half the market. It is take it or leave it. If you are at a top 5 business school, you may get some great borrower benefits. If you happen to have a lender who has a selling arrangement with a tax-exempt/9.5 secondary marketer, you may get a zero-fee loan. But they set the terms. You don’t get to bargain.

The years of HEAL auctions cut interest rates substantially. Thus, maybe 5% of FFELP borrowers will get worse benefits, while the rest will get a better deal overall. As long as FFELP is a federal program, the taxpayer is far more important than the student. Yes, the savings to the taxpayer are more important than the savings to the student. FFELP gets an incredible deal in Washington. It is an open-ended, mandatory spending program, subject to reauthorization only every five or six years rather than every single year. If the student is to become more important than the school and the taxpayer, then try going on annual appropriations like almost every other federal program. Schools waiting until Oct. 1 (at least) each fall to get the loan disbursement. Lenders and guarantors not knowing from year to year whether they would receive their federal checks. Some might quit the program rather than deal with that uncertainty. You dance with who brung you.

Anh Do, at 2:40 pm EDT on July 7, 2007