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Aid for Students, Not Banks

Aid for Students, Not Banks

April 21, 2009

Some choices, like whether to take a crushing amount of debt to go to your first choice college or settle for second best, are difficult.

Other choices, like whether to cut a wasteful government program that is prone to corruption and then use the savings to make college more affordable for low and middle income students, should not require much deliberation.

Yet student loan giant Sallie Mae, other lenders, and several members of Congress have come out against common sense reforms to the federal financial aid system proposed in President Obama’s budget plan. Of chief concern to critics is Obama’s decision to eliminate the Federal Family Education Loan Program (FFELP) and funnel all lending to students through the existing Direct Loan Program (DLP).

The president’s plan will save taxpayers $94 billion over 10 years by ending pointless subsidies to loan companies and using government funds to lend directly to students. Because loan repayment is guaranteed by the federal government, private lenders assume very little risk under the FFELP and yet are rewarded handsomely -- a subsidy that makes little economic sense. Much of the savings from the move to direct lending would be used to increase the maximum Pell grant award to $5,550 for the 2010-11 school year, and make the Pell grant a mandatory government program guaranteed an increase -- inflation plus 1 percent -- every year.

There are other important reasons to make the change. For one, the FFELP program is prone to corruption. A 2006 audit of the student lender Nelnet by the U.S. Department of Education’s inspector general revealed that the company had received more than $1 billion in taxpayer subsidies by gaming the system. Another investigation in 2007 led by New York Attorney General Andrew Cuomo found that lenders were lavishing gifts, payments, and other inducements on college financial aid officers in order to encourage them to recommend their loans to unwitting students.

Beyond its susceptibility to nefarious practices by loan companies, FFELP is also less reliable for students. In fact, Congress was forced to put the industry on life support -- by purchasing FFELP loans in order to provide struggling companies with fresh capital -- late last year.

So, what is the holdup?

Naysayers are voicing fears that eliminating lender subsidies could result in job losses. These concerns are, at best, overblown; a large work force will still be needed to process loans under the direct loan program, and companies like Sallie Mae can still have a role in servicing loans made through the program. Further, if Sallie Mae is so concerned about the job security of its employees, perhaps it should do some soul searching: Despite announcing losses of $213 million in 2008, the company paid its CEO more than $4.6 million and its vice chairman more than $13.2 million -- plus use of the corporate jet.

Seeing their golden egg slipping from their grasp, lenders are proposing a compromise that they claim will achieve up to 82 percent of the savings of a direct lending plan. The problem with the plan is that even if it does deliver on its promises, it will still result in over $17 billion in wasteful spending. To put it in perspective, this amount is equal to the cost of awarding more than 3.4 million young people the 2009-2010 maximum Pell grant award.

The student loan industry’s influence in this debate cannot be separated from their extensive campaign contributions to federal lawmakers. For example, The Hill newspaper recently reported that during the last campaign cycle, Rep. Howard P. (Buck) McKeon (R-Calif.), the senior Republican on the House Education and Labor Committee, received $20,000 in donations from major loan companies Sallie Mae and Nelnet, the most of any representative. Responsible members of Congress should be more concerned about supporting policies that will allow us to live up to President Obama’s pledge that “by 2020, America will once again have the highest proportion of college graduates in the world.” With the Lumina Foundation for Education estimating that by 2025 we will face a shortage of 16 million college-educated workers, this call to action must be heeded immediately.

Our country faces too many challenges for us to be providing pointless corporate welfare to loan companies. Our generation is inheriting a climate crisis, an economic crisis, a health care crisis, and a persistent crisis of severe economic and racial inequality. If Congress plays pork barrel politics rather than investing in the potential of America’s young people, then they are setting us up to fail at a time when failure is not an option.

Bio

Pedro de la Torre III is a senior advocacy associate at Campus Progress. Carmen Berkley is president of the United States Students Association.

 

 

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