Inside Higher Ed should be commended for breaking this story. It shows that every major piece of legislation has unintended consequences. One of the clear motivations of passing massive budget cuts to the traditional lender-based loan program was to take away the ability of lenders to offer rich borrower benefits that save students thousands of dollars. But they went too far and now they must live in a political environment where their own proposals, like the STAR Act, could actually produce savings if more schools leave the direct lending program to participate in the cheaper guaranteed program. It will be interesting to watch to see if advocates of the guaranteed program push as aggressively as direct loan advocates have over the past couple years. These new numbers may mean that limiting or eliminating direct loans will save billions of dollars that could go to Pell Grants. Isn’t that what the direct lending proponents have advocated for — leveraging “efficiencies” to increase need-based aid.

Kenneth Wright, at 8:15 am EST on December 5, 2007

Convenient

” .. the new budget numbers mean that presidential candidates like Hillary Clinton, John Edwards and Barack Obama should stop promising ..”

How convenient — all from one political party. Why? Because they want to hand out political favors for votes? To control which union friends get loans?

The direct lending (DL) program has been around for five decades. If DL did what its backers promised and created a fully-funded educational environment, there would be no need for DL today. It hasn’t, just like the toll roads that never managed to get paid off. Why?

What DL needs is an incentive to perform at higher levels. One such incentive is the GSL program.

B.J., at 9:40 am EST on December 5, 2007

The news is that the Department of Education has estimated that, after the recently enacted legislation, new FFELP loans that are issued in fiscal 2008 will cost $1.54 billion while new Direct Loans will cost $0.76 billion. Yet, FFELP provides five times as many loans as direct lending.

This is not, as implied by the previous poster, a cost for existing loans but for the new loans that will be issued by the two programs in fiscal year 2008.

Five times the volume at only twice the cost—now that is a taxpayer bargain!

Jo Brubaker, at 11:30 am EST on December 5, 2007

NDSL v GSL v DL

Was not NDSL, a result of Sputnik (1957)?

B.J., at 11:50 am EST on December 5, 2007

Ask CBO and OMB

Duh. You can be sure that if the loan industry’s random number exercise is accurate, they will get a Member of Congress to offer an amendment to cut back direct loans (prompting a CBO and OMB analysis confirming the savings). My bet is there won’t be such an amendment, because the numbers, while undoubtedly closer, haven’t actually reversed. (But if they have, then great: reform has helped bring down costs).

Zack, at 11:50 am EST on December 5, 2007

Because this isn’t the U.S.S.A.

Why don’t we just eliminate both loan programs? Why should taxpayers have to subsidize either loan program? For the most part, loans exist only because the taxpayers really don’t want to be paying for ALL of the cost of a college education. Perhaps colleges should simply reduce the cost of tuition equivalent to their average loan amount (like a few well-endowed private colleges have done). Perhaps if a student just doesn’t have enough money to pay for college on their own, they shouldn’t be there... we need more US citizens doing low income labor like cleaning hotel rooms, landscaping, bringing in crops, providing child-care services and such. Do we really need to educate those who don’t have enough financial resources of their own? The world needs ditch-diggers too!

Of course these statements are ridiculous... almost as ridiculous as the belief that it is better to have the government operate a loan program. There is ample proof that the private sector bankers are much better at it than government workers for whom 100% of their salary and benefit packages comes from taxpayers. You can tout that private corporations should not make a penny of profit from taxpayers or from college students. That’s a noble idea, but one better suited for another country. This is America, a Capitalist and Democratic nation where freedom and liberty reign.

Here’s the definition of capitalism as it is defined by Webster’s:

cap-i-tal-ism: n. An economic system in which the means of production and distribution are privately or corporately owned and development is proportionate to the accumulation and reinvestment of profits gained in a free market.

Alternately, we could run the country more like the DL proponents would suggest, similar to this form of government:

com-mu-nism: n. A system of government in which the state plans and controls the economy and a single, often authoritarian party holds power, claiming to make progress toward a higher social order in which all goods are equally shared by the people.

Don’t like when companies make profits? Ask yourself how much of your own salary you can do without and just turn that over to a private scholarship fund. Do you really need to spend so much money on a nicer car or a nicer house? Do you really need enough income to buy that new TV or new iPod? If you would just live as a minimalist and give back to the needy people every single dollar over the amount you need for basic survival, then college students wouldn’t need to take out a student loan at all... and the world would be a better place. (The United States would be a third world country... but I’m sure we would all feel better about not supporting profits for corporations).

Joe Banker, at 2:45 pm EST on December 5, 2007

Bipartisanship?

“...nickers in a tizzy...” Are you serious. This is a huge issue because the direct loan side has made program costs the driving issue in higher education policy for since the early 90s. Besides 1998, every major student loan change since the Clinton years have been driven by the costs of student loan programs. My hope is that we return to the same bipartisanship that existed in 1998, where both sides realized that the loan wars were distracting and preventing a consensus-driven examination of each of our student aid programs. But let’s be honest — that bipartisan spirit was broken by those in Congress who favor direct lending. It started with the STAR Act and has spread to budget cuts, investigations and proposals by leading presidential candidates. Inside Higher Ed has broken a story that is real, even as some try to desperately change the topic.

And by the way...there is no such thing as separate OMB and Department of Education cost estimates. They are the same and so expect essentially the same numbers to show up in the President’s budget in Feb.

James W., at 3:25 pm EST on December 5, 2007

it’s not about making money

The purpose of student loan programs, last time I checked, was to help students pay for their education. The measure of effectiveness is not how much profit it turns. Direct Lending was not established so that it could become a cash cow. And while FFELP advocates think that the government has no business operating a loan program, I don’t hear them complaining about state control and authoritarian power of the Pell Grant program. Of course not, because there’s no way for the Sallies of the world to make huge piles of money by giving grants.

And partisanship is thanks to the STAR Act? That bill didn’t even make it to a vote on the House floor, even Kennedy knew it would be dead on arrival. How about the Congress who wrote the discrepancy between DL and FFELP borrower fees into law?

This is all like blind men describing an elephant...two sides can look at the exact same thing and draw completely different conclusions.

DS, at 4:45 pm EST on December 5, 2007

Intermingling

The main reason for a change in OMB (but not CBO) estimates is the intermingling. In the OMB estimates, you are almost getting to the point where FFEL is essentially DL and DL is essentially FFEL. The age of widespread loan consolidation has proven the wisdom of CBO’s approach and CBO’s claim that OMB does not follow the credit reform act to the letter. OMB considers consolidation loans to be brand-new student loans. Thus, the consolidation of defaulted FFEL loans into DL improves the OMB estimates of the “FFEL program” and worsens the OMB estimates of the “DL program” (to the extent that OMB believes that a previous history of default makes a borrower much more likely to default again). Similarly, the aggressive marketing of FFEL consolidation loans to the superior DL school-blend borrower pool improves the OMB estimates of the “FFEL program” and worsens the OMB estimates of the “DL program.”

CBO on the other hand does not consider consolidation loans to be new loans but rather a repayment option. Thus, cross-consolidation does not impact the CBO estimates the same way it impacts the OMB estimates. A DL consolidation loan that defaults is “charged” against FFEL if it was FFEL stafford loans that consolidated into DL, while a FFEL consolidation loan that repays is “credited” to DL if it was DL stafford loans that consolidated into FFEL. Every change in the law regarding intermingling has benefited FFEL. HERA, far from being a blow to FFEL, contained provisions discouraging direct lending, particularly consolidation.

Which program is more “socialist"? Hard to say for sure. For those who say that FFEL executives and investors make a fortune, thus proving that they are “private sector-ish,” this seems plainly wrong. Imagine you and I have lemonade stands on the same street. You use your ongoing revenue to cover your operating costs. I, on the other hand, have my favorite Uncle covering much of my operating costs. Who’s going to have the ability to provide customers with comfortable chairs, organic lemons, multicolored straws, insulated cups, big electric fans to cool customers during the hot weather, etc. I am the FFEL side, with guarantee agencies receiving a generous variety of administrative fees and lenders guaranteed 98% principal and accrued interest from Uncle Sam if a loan defaults; guaranteed a quarterly payment from Uncle Sam ensuring a market interest rate; and guaranteed plausible deniability of pretending to be “private sector” when my lifestyle is due to Uncle Sam. A couple of guarantee agencies when questioned by state officials about excessive spending actually said, don’t worry mr. state auditor, no state funds were used, it is Uncle Sam’s money. It seems the only one required to carry its own weight is DL, which is charged hefty interest by its “colleague” Treasury. If private contractors are socialist, then where’s the clamoring from ideologues to shut down the defense dept.? And there are more bureaucrats working to administer the much larger FFEL program than DL. Not to mention the guarantee agencies and secondary markets which are state bureaucracies.

For those who want the government entirely out of student loans, this would mean going to a system of entirely alternative loans. Lenders have questioned whether high-risk schools and students would have access to any loans at that point. Getting the govt out of student lending would mean no more FFEL or DL.

Jim, at 5:25 am EST on December 6, 2007

The Borrower Pays

The last comment raises a good point.

A significant portion of the decline in FFELP’s subsidy rate from whatever it was before to $1.72 came right out of the pockets of the families that FFELP lenders serve. A significant portion was passed on to families in the form of interest rate and fee discounts, better service, convenience, default avoidance programs and investment in technology and new processes.

Yes, some of it was kept as profit. And a miniscule amount was used to buy pizza and hold meetings at the Chicago Ohare airport in January. But no one has established that lender margins were unreasonable (See Congressional Research Service, Mark Kantrowitz and half a dozen Wall Street analyses). Sound bites from FFELP critics don’t qualify as proof.

America’s families made FFELP cheaper. And they’ll pay for it over the next 10-30 years.

Where did it all go? Some went to pay for Pell grant increases and other programs that benefit a subset of families. Much of it went to pay for the war and tax cuts.

Alex Hamilton, at 8:35 am EST on December 6, 2007

Right on Rivka

You really hit the nail on the head, Rivka. I just wonder why that didn’t concern the policymakers who rammed this last reconciliation bill through. If I were still a graduate student, I’d have some really hard questions for my elected representative about why they wanted to make my loan more expensive so that an undergraduate student somehwere could get a slightly larger Pell grant and slightly lower loan rate. If we’re being honest about wanting to help “all” students, the CCRA fails the test.

Scott, at 4:50 pm EST on December 6, 2007

The Bottom Line

Jim, good luck explaining your theory about the “school-blend borrower pool” and how consolidation loans impact CBO vs. OMB scoring models. You sound like the lenders when they complain about deficiencies in the respective scoring models.

The bottom line is that proponents of the FFEL program will be able to point to a single page in the President’s budget like the DL proponents did for so many years.

Just as important, regardless of what the exact subsidy estimates are, no longer will the DL side be able to say lenders get “excess subsidies” nor will they be able to propose changes to the FFEL program (or expansion of DL) to pay for other things. This is good news for all of us who care about student aid. Congress will be forced to invest in higher education instead of moving money around within the system.

Kenneth Wright, at 7:00 am EST on December 7, 2007