Playing Politics on Student Loans

March 17, 2008

They just can't help themselves.

Even when Education Secretary Margaret Spellings and Democrats on the House of Representatives Education and Labor Committee generally agree about the size and scope of a problem, their clear enmity for each other overwhelms the accord and produces unpleasantness that is painful to watch. Such was the case Friday, when Rep. George Miller (D-Calif.) brought Spellings before the panel he leads to talk about whether and how the disruption in the financial credit markets is affecting students' access to loans and how the government should be responding.

On the substance of the matter, Spellings and Miller, who have battled frequently in recent years, largely agree: They both assert that so far, the "credit crunch," while hurting some lenders and resulting in meaningful cutbacks in the availability of private or alternative loans, has done little or nothing to disrupt access to federal loans for student borrowers. They’ve also agreed that major action to bolster the loan programs -- which lenders, for-profit colleges, and some Republicans favor -- is uncalled for or, at least for now, premature.

In her testimony before the committee, Spellings said that the Education Department was taking various steps to ensure that students were not having their access to federal loans (and therefore to college) disrupted by the tightening of the credit markets. Each time an individual lender announces that it is either cutting back or abandoning its participation in the loan programs, department officials check in with colleges where that lender provides at least half of the loans and make sure that the institutions have found alternative loan providers for their students.

Spellings also said the department is surveying guarantee agencies to make sure they have procedures in place to step in as the “lender of last resort” for borrowers who cannot find other access to federal loans, and that her agency plans to issue guidelines this week for how those procedures should work. And the department is working, too, she said, to ensure that the government's direct student loan program, which competes with the lender-based guaranteed loan program, is positioned to step in and provide loans if the capital markets constrict further.

“The steps my department is taking will help ensure that [federal student loans] remain available,” Spellings said in her opening statement to Miller and other committee members. “As you said in your letter, Mr. Chairman, while ‘we expect that overall credit market conditions will soon improve, it is only prudent to prepare now to ensure that these conditions do not negatively impact students.’ “

But even though Miller’s previous statements had indeed minimized the current impact of the credit crunch in student loan availability, the lawmaker, in his questioning of Spellings at the hearing, and in a news release he issued after the event, took her to task for having taken too few concrete actions so far.

Federal law calls on the department to advance money to loan guarantors if they do not have the capital to finance “lender of last resort” loans, Miller said. “Have you turned to [the Department of] Treasury and said, ‘If we need to turn to you for $100 million or $5 billion, can you do that?’ “ he said. When Spellings and her aides said they knew they had the authority to ask for those funds, Miller responded sharply: “I’m asking whether you have asked the operational questions. We had a lot of authority going into Katrina, but nobody asked could we physically get people out of there.”

“We’re having ongoing discussions” with Treasury about that and other matters, said Kent Talbert, the department’s general counsel.

“But you have not received an answer to the question, can the demand be met?” Miller charged at Spellings and her aides again. Referring again to Katrina, he said: “I hope you're not standing in eight feet of water with students without loans looking for relief, and you're having ongoing discussions.”

Spellings reassured Miller that she would speak to Treasury Secretary Henry M. Paulson Jr. soon and “ask him that very question very specifically.”

Meanwhile, Miller’s Republican counterpart on the committee, Rep. Howard P. (Buck) McKeon (R-Calif.), put a very different spin on the credit crunch, suggesting that Spellings (and Miller) were underplaying the impact of the crisis even now.

While McKeon, ever the gentleman, said he shared Miller’s view that “our intention today is not to sound a false alarm” and to “identify solutions so that we are prepared, whether or not the situation grows worse,” he also made clear that he believes the problem is larger and more immediate than Democrats and the Education Department are suggesting.

Noting the significant contraction in the availability of private student loans, particularly to for-profit colleges and their students, McKeon insisted that the cutbacks Congress made to subsidies for student loan providers in the last three years are “certainly playing a role” in the market instability. “You say you’re not hearing from schools that there’s a problem,” he said to Spellings, but we’re hearing from schools, especially in the proprietary area, that the cost of private loans” is growing and that “that has actually increased what students are going to be paying on interest on their loans.”

“I’m glad we’re having this hearing,” McKeon said. “I think that a few months from now, we’re going to look back and say, ‘Gee, where did all this come from? I see a very serious problem coming down the pike. I hope this hearing is soon enough that there's a wakeup call.”

It seems (sadly) that no Congressional discussion of student loans is complete these days without some partisan bickering about the competitive status of the guaranteed and direct loan programs. In that vein, Rep. Ric Keller (R-Fla.) sought to elicit from Spellings and her aides a clear statement that just because the department is taking steps to prepare direct lending to handle any colleges that might seek to switch to the government-run program, that doesn't mean its leaders think that institutions should switch. (Some Republican lawmakers have suggested that Democrats might use the credit crunch to bolster the direct lending program, which has lost market share in recent years.)

"Have you seen any increase in schools considering direct lending?" Keller asked Spellings.

"A very small number, Congressman," the secretary responded.

"You're not suggesting schools should switch, are you?" Keller asked, leadingly.

"Absolutely not," came Spellings's reply.

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