The Fight is on for Student Loans

By Watson Scott Swail, President and CEO, Educational Policy Institute

Yesterday afternoon, The House Education and Labor Committee announced that it will include its legislative reform of the student loan system in the reconciliation bill containing the Health Care plan. If passed, on July 1, 2010 every Title IV institution in the United States will become part of the Federal Direct Student Loan Program (FDSLP). After 45 years, the Federal Family Education Loan Program, or FFELP, will fade away. To put this in perspective, until recently, FFELP held 70 percent of the student loan business.

For a quick backgrounder, The Clinton Administration introduced the Direct Loan Program back in the 1990s, with the idea of doing exactly what the Democrats are now ready to legislate. Take the loan business from private lenders, who get a subsidy from the government, and bring it inhouse. However, the Republican Congress limited the role of the FDSLP and only about 20-25 percent of the institutions decided to go to the Direct Program. Up until a year ago, about 30 percent of institutions used the FDSLP; the remainder using the FFELP.

There are arguments on both sides of the loan debate. On the pro-Direct side, the Democrats believe that this is an area where government can do a good job and use the funds that were used for subsidies for other education priorities. These include increasing Pell by $36 billion over the next 10 years and investing money into HBCUs and other minority-serving institutions.

On the pro-private side, lenders say they provided a unique service that allowed for competition in the field. Those institutions who have continued to use FFELP lenders, find their services extraordinarily helpful in serving students. They worry that these services will largely disappear under FDSLP. And they may be right.

If the government can do the loan system right, they will save billions of dollars in taxpayer money. Can they do it? Thus far, most colleges and universities with the Direct Program seem satisfied, even though they typically admit they have to do more themselves. But after the private loan debacle of a few years ago (the Andrew Coumo Show), private lenders have had to cut way back on services to keep in line with new rules and limits. So the gap in services isn’t nearly what it was.

This isn’t a done deal, although everyone in the loan industry expects it to come out as predicted. Last week, six Senate Democrats sent a letter to Senate Leader Harry Reid asking him to reconsider the legislation. They said it could put jobs at risk, among other potential outcomes. One must note that several of the signers, including Mark Warner, Ben Nelson, and Blanche Lincoln, have received campaign contributions from Sallie Mae in the past.

During the past year, approximately 20 percent of institutions have moved from FFELP to the Direct  Program, giving the FDSLP about half of the loan business. This was a move by institutions who were instructed by the US Department of Education that the switch would happen by July 1, 2010. These institutions thought it would be prudent to do so now rather than wait. They were probably right to do so. However, it will be interesting if the loan bill, for some reason, does not go through. There will be some foul people.

But through reconciliation or other routes, this bill is likely to pass, opening a new door on student aid in America. Only time will tell whether the legislation saves money and provides the necessary support for institutions, students, and families.

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