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A 'Third Way' on Student Loans?

A 'Third Way' on Student Loans?
April 1, 2009

WASHINGTON -- The Obama administration's 2010 budget proposal in February to eliminate the lender-based guaranteed student loan program poured gasoline on the longstanding (and, to many, tiresome) debate over whether that program or the federal government's competing direct loan program is more efficient, cost effective, etc.

The latest installment of the debate unfolded Tuesday during a forum here at the New America Foundation, a think tank whose higher education analysts are strongly allied with and generally supportive of the new administration's policies, including its plans to restructure the loan programs.

But if the forum was a bit one-sided, New America can't really be faulted; MaryEllen McGuire, who directs the foundation's Education Policy Program and moderated the event, noted that four loan industry officials had turned down the chance to appear, and the person who took her up on the unenviable request, the lobbyist Scott Fleming, joked that he had "always said I'd walk on broken glass for [McGuire], and this may be as close as I get."

Those who demurred probably figured that this was a thankless time to be defending a guaranteed loan program that has taken a pounding from (in rough order) a heavily publicized controversy over potential conflicts of interest, a Congress that has sucked profits from it since 2006, the near-collapse of the financial markets, and now a proposal to more or less eliminate it. Robert Shireman, who as a consultant to Education Secretary Arne Duncan is widely seen as the architect of the administration's loan plan, was the featured speaker at Tuesday's event, and he laid out the most complete public case yet for the proposal. (A Webcast of the event can be seen here.)

The administration's plan, Shireman said, would use the most efficient and cost-effective method of raising money -- auctions of U.S. Treasury bills -- to get capital to make the loans. It would originate and disburse the loans using the government's existing system for distributing Pell Grant funds to colleges and collecting data about students from them, an "easy add-on" to a system that works.

And, perhaps most importantly, and in starkest contrast to the current system, he said, the student loans would be "serviced" -- the process by which loans are collected and student borrowers are helped on the sometimes rocky road to repayment -- "by the best servicers based on customer service and preventing defaults." The government would force companies and/or state agencies -- many of the same parties that are now in the guaranteed loan program -- to compete for contracts to service loans, and "those that can't compete, are not doing a good job, then they get less business."

Fleming, a former Republican Congressional aide who is now a director of the Chartwell Education Group, a consulting firm, said that "lenders for the most part don't disagree with what the administration is trying to accomplish," in terms of its goal of developing a less expensive, more stable student loan system, but "disagree with some of the methods the administration is proposing."

Channeling the well-honed arguments that student loan providers have made for years (and with more intensity of late), Fleming questioned whether the shift would really save taxpayers money, and said that terminating the guaranteed loan program would eliminate the healthy competition that has existed between the two loan programs, prompting innovations and better terms for borrowers.

Paul Combe, president and CEO of American Student Assistance, one of the loan guarantee agencies that plays an integral part in the lender-based loan program, described himself as arguing for "none of the above." He has spent the last couple years trying to rise above the fray of the fight in which supporters of the two programs "try to kneecap each other," instead pitching the idea of creating a unified loan program that would build on the strengths and mitigate the weaknesses of the two existing programs and "put the consumer first," he said Tuesday.

The current battle, he said, "starts to sound like [the old commercial], 'Tastes great, less filling,'" Combe said. The guaranteed loan program "is not working, period," he said. "Because of that, do we stay in this box and say, 'This one failed so therefore we're [going entirely with direct loans],' without looking at the things that don't work in that program, too?"

Combe said he believed the fact that President Obama was "willing to make change" presented a climate in which supporters of alternatives to the two existing loan programs -- those who support a "third way" -- could have their ideas heard, a view shared by Quentin Wilson, president and chief executive officer of All Student Loan, who was in the audience at Tuesday's New America event. He asserted that loan industry officials have been too unwilling to change, but quoted the British author Samuel Johnson in suggesting that lenders' tough times might force them to reconsider their reluctance: "Depend upon it, Sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully."

Wilson noted that many such ideas are out there, including a recent one from the National Association of Student Financial Aid Administrators, but said that it would be a mistake to rush a set of changes, as might be necessary if Congress sought to mandate restructuring of the student loan programs through the pending budget reconciliation process this summer. "The administration's willingness to talk about this may get us to something better," Wilson said, noting that he and Seamus O'Neill, another purveyor of loan program alternatives, called the discussions a "bridge to somewhere."

Shireman, the Education Department official, said in response to a reporter's question that the administration was open to alternatives, as long as they were consistent with the goals of the president's own proposal. "There is a lot of good conversation going on, and people are putting together proposals they've had for a number of months," Shireman said. But he added that he had not seen a proposal with enough specificity to be able to judge whether it might meet the administration's tests.

One loan industry official who was not at Tuesday's event was Brett Lief, president of the National Council for Higher Education Loan Programs. He said that many participants in the guaranteed loan program have "thought for the last three years that the status quo is not sufficient," and that "I don't know anyone on the student loan side that is satisfied" with the current system. A group of higher education loan officials, Lief said, are within weeks of putting forward a plan of their own that is consistent with the administration's goals.

In contrast to recent years, he said, when Congress has rammed through changes in the student loan programs without meaningful discussion about what would be intelligent public policy, "I think there's a perfect opportunity now ... to come up with a funding model that will provide necessary assurances for liquidity, provide the guarantees and other services that students and families desire, and allow for the competition and accountability that are necessary."

He added: "We're going to come to the table with ideas."

 

 

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