Lenders' Labors Lost

June 14, 2007

"Thank you for considering signing on to the attached group letter, which encourages Congress to continue making higher education accessible and affordable using the widest range of government- and private-sector loan programs and partnerships," the handwritten letter begins.

Written on joint Nelnet and Consumer Bankers Association letterhead, messages like this one have been faxed to local chapters of the American Federation of Teachers, AFL-CIO and other unions over the past couple of months, setting off a backlash over what the unions say is a misleading campaign to gain support for continued federal subsidies to the student loan industry -- subsidies many Democrats are pushing to scale back (see related article here).

The faxed messages have nearly identical wording and accompany requests to sign form letters to Democratic senators from a particular region. One sent to the Indiana Federation of Teachers, for example, urged the recipient to complete and fax the accompanying letter to Sen. Evan Bayh. "Every family in Indiana has reason to be concerned ...," the cover letter continues, although "Indiana" appears to be written in a different hand from the rest of the document.

Another faxed message to the International Brotherhood of Electrical Workers Local 111 in Denver had similar wording but different handwriting, yet both said they were from the same person named Aaron Cutler.

Fritz Elmendorf, a spokesman for the consumer bankers' organization, said the letters were part of a "grass roots" campaign to reach out to groups that have an interest in education. "We’ve … been sending some of the language urging union members to write to senators urging support for choice in loan programs and opposition to anything that would undermine the programs that have been successfully helping students get through college," he said.

Elmendorf added: "We think it’s fair, and we’re not trying to mislead anybody because we’re sticking to broad principles that have had bipartisan support in the past," such as Federal Family Education Loans, offered by private lenders and subsidized by the government.

The lenders' argument has been that competition in the private market has led to rates that are currently lower than those of the government's competing direct loan program, with profits allowing for investments in technology and greater efficiency that reduce the rate of loan defaults. The faxed letters emphasize that the student loan programs have been working and that without subsidies, the FFEL program could be destroyed, leading to less choices for students.

But the program has come under fire from some Democrats amid a slew of investigations into the relationships between colleges and lenders. The House Democratic leadership's proposed legislation to renew the Higher Education Act, which has some Republican support, would gradually cut off subsidies to lenders and redirect the funds to bolster the existing government direct loan program. Unions have generally backed this approach, saying that with increased support, the federal program would offer better rates than those from private lenders.

"This just appears to be what the loan industry does best: spreading fear to try to keep their subsidies high. It’s an unfortunate effort to mislead people about what’s really at stake," said Stephen Burd, a senior research fellow at the New America Foundation who has been investigating the student loan industry.

The AFL-CIO struck back with a memo this month from the organization's secretary-treasurer, Richard L. Trumka, to the executive council and state officers. He wrote: "As recent press accounts have shown, the student loan program has been subject to abuses that harm, not help, students and their families. The CBA's actions in spreading erroneous information continue that pattern. Our sisters and brothers at the American Federation of Teachers are leading the charge on the reauthorization of the Higher Education Act and will fight for additional resources for the direct loan program."

The AFT hasn't been silent on the issue, either. Kristor W. Cowan, the union's legislative director, sent a letter on Monday to Rep. George Miller (D-Calif.), the chairman of the House Committee on Education and Labor who is a key backer of the higher-ed law's reauthorization. Cowan urged Miller to continue "reforming the student loan industry and preserving a vibrant direct loan program."

Lawrence Gold, the higher education director of AFT, said that loan companies have been trying to "starve" the direct loan program and are resisting curbs on their profits.

Which begs the question: If unions have been actively and vocally opposed to private lenders, why even try lobbying them?

"I don’t know if anyone has sort of been taken in by this," Gold said, but "by the same token, if these things are going out to unions all over the country, many of which are not ours and not necessarily plugged into our issues, it’s not surprising at all that they could get a further inquiry into it."

Amid these lobbying efforts, there have also been reports that embattled lender Sallie Mae has been reaching out to members of the Congressional Black Caucus with arguments that if the loan industry's subsidies are cut, students at historically black institutions will get hit disproportionately hard. Sallie Mae did not respond to calls and e-mails seeking comment.

The New America Foundation's Higher Ed Watch blog wrote that "while there might be public support for increasing the accountability for defaults on the college level, it's hard to stomach the thought of a system where the students who most need help getting to and getting through college are offered the most expensive loans and the least forgiving terms."

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