Last week we worked with our partners at the US Students Association to get an op-ed published in Inside Higher Ed, a higher education trade publication. We argued that President Obama’s proposal for student aid reform—cutting a wasteful and inefficient corporate welfare program that would cost $94 billion more over ten years in order to expand need-based aid for students—is a damn good idea for students, young people, and the future of the country.

In today’s edition, the executive director of America’s Student Loan Providers, a lobbying group for student loan companies, responded with his own op-ed in the same publication.

A detailed (and extremely long) refutation of his claims is below the fold.

The author of the piece, Kevin Bruns, claims that:

If the Obama administration’s budget proposal to eliminate the Federal Family Education Loan Program succeeds, there’ll be even fewer [programs addressing college access and completion rates]. That the author of is unaware of the extraordinary work done by guaranty agencies and lenders in the areas of college awareness and access speaks volumes of the quality of the debate around the administration’s proposal – and the need for more careful examination.

 

Some lenders and guaranty agencies do have some valuable philanthropic programs that address college access and completion rates, and we hope that these organizations continue whatever good work that they might be doing in these areas. However, it makes little sense to continue a program that would—quite unnecessarily—cost taxpayers $94 billion dollars more over the course of ten years in order to “save” uncoordinated philanthropic programs:

1. Obama’s proposal for federal/state partnerships on access and affordability would direct $2.5 billion to these ends. Some of these funds could be used to continue some of the programs currently funded through the unnecessary bank subsidies now on the chopping block.
2.  There is no way of know how many programs run by lenders or guaranty agencies would actually be canceled if the President’s policies are signed into law. Many of these companies and organizations have other divisions of their business (like alternative student loans), others may be able to adapt to a new niche by, for example, competing for federal contracts to service federal direct loans. We hope that, wherever possible, lenders will continue whatever good philanthropic work they are doing the same way that other companies—not blessed by decades of government handouts—have managed. The second largest Guarantee Agency supports the president’s proposal.
3. Rather than a hodgepodge of voluntary efforts to tackle the problems of completion and access, the President’s proposal maintains a great deal of room for experimentation while requiring more research, coordination, and accountability. Check out the Center for American Progress’s ideas on how to structure this part of Obama’s proposal for maximum impact.

Bruns goes on to argue that:

…more than 1,560 financial aid professionals have signed an independent, online petition opposing the Administration’s proposal.

While some financial aid officers and other college administrators are skeptical of the proposal, many others are enthusiastic supporters. First of all, the President’s proposal enjoys the enthusiastic support of the National Direct Loan Coalition, which is comprised of schools that already participate in the Direct Loan Program.

Additionally, more that twenty associations representing college administrators—including the usually lender-friendly National Association of Student Financial Aid Administrators—sent a letter to Congress on April 21^st that, while acknowledging some wariness on the part of some institutions, argues in favor of the President’s proposal. Ultimately, these associations found that the proposed changes to the Pell grant program that will be funded by student loan reform outweigh other concerns.

There are some benefits to both students and school from switching to the direct loan program. One of them is that the federal government will not avoid some schools altogether because they are community colleges or primarily serve low income students.

Bruns goes on to ask:

Are the projected cost savings from eliminating FFELP real? The short answer is No. […] the cost savings projected could very well vanish. Congress could wind up eliminating the more cost effective program. 

The estimated savings are contingent on economic conditions, and are not perfect, but non-partisan assessments from the Office of Management and Budget, the Government Accountability Office, and the Congressional Budget Office (CBO), as well as Presidential budgets (yes, even under Bush) consistently found that the Direct Loan Program costs taxpayers less per dollar loaned. The recent CBO analysis is the best measure that we have; if Bruns can come up with a convincing estimate that shows that the FFEL program will cost taxpayers less we will promptly concede our argument.

Bruns continues:

Healthy skepticism is warranted for another reason. “Subsidy costs are estimates about an uncertain future and could be manipulated,” a 2004 OMB memo explained. “There is pressure on occasion to manipulate the estimates.”

Bruns conveniently leaves out the very next point in the OMB memo:

The Congressional Budget Office and General Accounting Office have not found evidence of systematic bias. Having the Office of Management and Budget in final control of the estimates made by the agencies is important in limiting misestimates.

Bruns continues with a truly strange argument:

Apart from whether the savings are real is what they actually represent: The government profiting on its low, low borrowing costs (close to 0 percent), while the borrower rate is as high as 6.8 percent.

Would you rather pay an interest rate of 6.8% that will fund AIG style raises for Sallie Mae’s CEO—you know, the one with a private golf course—or to fund need based grant aid?

This is more of an argument for lowering the interest rates on federal loans than continuing the FFEL program, where students pay the same interest rates. If this were his argument, it would also be flawed, however. While lower interest rates would be helpful, the higher priority should be meeting the demonstrated but unmet need of many students from low and medium income families, and lowering student debt overall. Applying the savings to the Pell grant program will further these priorities more than interest rate cuts.

Bruns continues:

A third strength is the program’s continuous innovation. Lenders have invested millions of dollars in developing more convenient processes, such as eSignature, and improving customer service. Consider this: almost every major processes and convenience used by the Direct Loan program was invented by FFELP’s private sector participants.

There is some reason to be skeptical of claims that customer service is better under FFELP than under the direct loan program, and the difference cannot possibly be worth $94 billion over ten years, or the number of new and larger Pell grants that these savings would create.

Private companies will still be involved in student loan servicing in the direct loan program if student loan reform is passed. They will still, we hope, have an incentive to develop ways to improve customer service as they compete for government contracts. The best way to improve customer service would be to include cost and quality as considerations when awarding federal contracts to loan servicers, and to make sure there is good oversight of contracted servicers under the direct loan program.

Finally, Bruns argues that:

…FFELP has to be one of the government’s most small “d” democratic programs. Not only do schools get to choose which program to participate in, students get to choose their lenders. With respect to schools, they’ve always preferred FFELP by overwhelming majorities – even today after years of budget cuts and during the current credit crisis. 

Every student group that I am aware of that has taken a position has sided with the President’s proposal, not with the status quo. Schools have increasingly turned to the direct loan program since the program became unstable, requiring emergency legislation to keep lending. The switch from FFELP to the direct loan program got rave reviews from financial aid officers.

A more democratic policy would involve taking corporate welfare from banks, and using it to expand access to higher education.