Feeling Like a Fait Accompli

July 15, 2009

SAN ANTONIO -- You could play a game of touch football in the exhibit hall at the annual meeting of the National Association of Student Financial Aid Administrators here without hitting a lender, given the relative dearth of banking and other companies pitching their wares to the college officials in attendance. And the muted atmosphere in the massive conference center hall had the feel of a wake, an apt metaphor for an industry that, while not yet dead, is fighting for its life.

The fate of the Obama administration’s proposal to end lending through the bank-based Federal Family Education Loan Program is still an open question, even as Democratic lawmakers in the House of Representatives announced Tuesday night that they would soon act on legislation that fully embraces the Obama plan. (Details below.)

And while there is some bipartisan opposition to the Obama proposal, and lenders express confidence that there is support for alternatives they are pushing, they would have been hard-pressed to walk out of the NASFAA meeting feeling particularly upbeat -- and not just because of the funereal atmosphere in the exhibit hall.

While a strong majority of colleges still participate in the bank-based system, Obama administration officials have been saying for months that the FFEL, or guaranteed loan, program, as it is known, is on “life support,” and putting forward an air of inevitability about the transformation that seems to be becoming a self-fulfilling prophecy.

And to judge from various signs at the financial aid officers’ meeting here, that inevitability seems to be taking hold, even though some college administrators remain skeptical of the wisdom of the administration’s proposed shift.

The administration’s political leaders, not surprisingly, continued to strongly advocate the Education Department’s position that ending bank-based lending would save tens of billions of dollars that could be used to increase financial aid for students. (Robert Shireman, the deputy under secretary of education, also continued to cling to the prospect of a “Pell Grant entitlement,” in which money for the key need-based aid program would increase automatically without the need for Congressional approval each year, even though it seems clear that the government cannot afford such a change.)

In addition, college administrators swarmed into multiple sessions in which Education Department staff members explained how to shift from the FFEL to the direct loan program. Many of the aid officials said they were getting up to speed in case they are forced to switch, and department officials did their best not to get out in front of Congress, and to make FFEL supporters feel as if they were cheerleading for direct lending. “You can’t wait for the budget to be done to start planning,” given that the Obama plan (and the House legislation) call for a full switchover to direct lending less than a year from now, says Susan O’Flaherty, who works for the department's Federal Student Aid office.

“This is a preemptive strike to do some of the things that will save you having to do this in a hurry if this all happens and comes to pass later this year,” said Wood Mason, another department staffer. “This does not obligate you in any way” to begin lending through the direct loan program this year, he added.

Try as they might to stick to “if” to refer to the transition to direct lending, though, department officials occasionally slipped up and said “when.”

One of the few busy booths in the exhibit area was the one manned (and womanned) by the National Direct Student Loan Coalition. A steady stream of financial aid administrators stopped by the coalition’s booth to ask questions, take information, and get the business cards of peers whose institutions are in direct lending, and happily so.

During the meeting, officials at NASFAA also discussed the results of a survey of financial aid officers whose colleges had recently switched to direct lending. Justin Draeger, vice president of public policy, advocacy and research at the association, said that 73 percent of respondents whose institutions had recently switched said the transition had been easier than they thought, while 4 percent said it had been more difficult.

Sixty-one percent said they found the administrative burden to be less severe in direct lending than in the FFEL program, and 84 percent said they did not have to add staff members to administration the direct loan program, a fear commonly expressed by aid administrators who favor FFEL.

But respondents reported the biggest “hiccups,” Draeger said, in the technology related to the new program, and how well it integrated (or didn’t) with their existing financial aid and other computing systems. “We are concerned ... that all schools have adequate time, to make sure their own IT staff and infrastructure have time to make the conversion,” Draeger said.

While 80 percent reported that they had been able to make the transition to direct lending within four months, 14 percent said it took them more than seven months, which is a matter of concern with a potential deadline for switching over -- July 1, 2010 -- looming, he said.

Those and other issues are clearly on the minds of aid administrators as they discussed the loan programs between sessions and over meals at the NASFAA meeting. Many said they embraced the goals of the Obama proposal, of using the estimated $87 billion in savings to increase aid for students and make college more affordable.

But some, especially those who are happy in the guaranteed loan program, questioned whether the projected savings would materialize, expressed reservations about whether the Education Department would be able to handle the increased burdens it would face, and feared that they would have to spend significantly more to counsel student borrowers and perform other functions that their lenders now provide.

Lenders are certainly playing to those fears in promoting their own proposals to lawmakers, and insist that they are finding “good receptivity” to their proposal in the Senate, said Ron Gambill, chairman and CEO of Edsouth, a nonprofit lender.

The die has largely been cast in the House, as became clear Tuesday night when the Democratic majority on the Education and Labor Committee said it would introduce legislation today to carry out the Obama plan. The legislation, which Rep. George Miller will unveil during a conference call today with Education Secretary Arne Duncan, evidence of their alignment, reveals some evolution in the plan President Obama initially unveiled in February, most notably by giving up on the idea of a “Pell entitlement.”

The House legislation would direct $40 billion over 10 years to increase the Pell Grant to $6,900, with annual increases pegged to the increase in the Consumer Price Index plus 1 percent coming out of so-called mandatory funds, so that supporters would not have to fight for increases from Congressional appropriators each year. But Congress would still have to agree to provide the base amount (currently $4,860) each year. Making the entire Pell program an entitlement would be “prohibitively expensive," a House Democratic aide said Tuesday. (Estimates have put it at $300 billion over 10 years.)

Like the original Obama proposal, the House legislation would also create a $500 million annual fund designed to provide incentives to colleges and states to increase college going and completion rates, especially for low-income students, and radically remake the Perkins Loan Program. It also would fund the community college initiative that President Obama officially unveiled on Tuesday (see related article).

But it also would tap into the $87 billion in savings for a set of other priorities that give the measure the “Christmas tree” feel that many pieces of Congressional legislation have these days.

Some of these would benefit colleges and their students, including $1.2 billion in additional aid for for historically black and other minority-serving colleges, and a shift to variable interest rates (capped at 6.8 percent) for federally subsidized loans beginning in 2012. Congress is steadily cutting the interest rate on such loans to 3.4 percent by 2012 under budget legislation it passed in 2007, but the rates are set to rise back up to 6.8 percent after that.

Other savings in the bill, however, would go elsewhere. House leaders propose creating an “early learning challenge grant” program, at a cost of $10 billion over 10 years, to award grants to states to invest in early childhood education. The legislation would also provide more funds (which many Democrats pushed for in last fall's economic stimulus legislation) for school modernization, renovation and repair.

And the legislation also would put $10 billion of the funds saved from the loan programs toward reducing the federal deficit, House aides said.

Rep. John Kline of Minnesota, the senior Republican on the Education and Labor Committee, called the Democrats' proposal "more of the same," designed to produce a "bigger, more intrusive federal government making spending promises it can't afford to keep.... While we all support
investments in Pell Grants and other meaningful efforts to expand college access, these initiatives should not be financed by permanently
eliminating the role of the private sector in student lending."

But as supporters of the Obama (and now Miller) proposal like to point out, even the FFEL program is heavily financed by government money now, as a significant proportion of the money that banks lent to students in 2008-9 resulted from the 2007 law (known as the Ensuring Continued Access to Student Loans Act) that ensured that non-federal lenders would have access to loan funds.

Without that law, even many supporters of FFEL acknowledge, the program probably would have collapsed, and that fact strengthens the hand of administration officials when they say that the guaranteed loan program is on shaky ground.

And as the NASFAA meeting helped make clear, they may have repeated that mantra enough to make it inevitable.

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