"You can dress this up 100 different ways and put a Santa Hat on it, but this is still the same budget gimmick lenders have been pushing for months to line their own pockets" - Rep. George Miller
The Congressional Budget Office (CBO), at the request of Sen. Casey, just examined the alternative to the Student Aid and Fiscal Responsibility Act (SAFRA) written by Sallie Mae. The last time the plan was examined by the CBO, it found that it would mean $13-17 billion less in grants for students, investments in community colleges, funding for early learning programs, etc.
This time around, the CBO put that number at $4 billion.
But, as Rep. Miller said in a press release earlier today, “you can dress this up 100 different ways and put a Santa Hat on it, but this is still the same budget gimmick lenders have been pushing for months to line their own pockets with billions of dollars that should be used to help students.” Both Rep. Miller and Sen. Harkin—Chairmen of the House and Senate education committees, respectively—pointed out that Sallie Mae was able to do better with the CBO this time because the lenders had their plan “sunset” after five years, while SAFRA is calculated for 10 years.
The lenders will, undoubtedly, fight for their plan to be continued in five years, which would mean at least $8 billion less to invest in education.
While it is a big concern, the billions less for education or not the only reasons to opposed the Sallie Mae proposal. It would also mean that some of the benefits of SAFRA would go unrealized. Compared to real reform, the Sallie Mae plan would mean worse servicing for students, conflicts of interests both in orginiation and default prevention/collections, and less accountability for many institutions that have already had problems with corruption. Ben Miller at the Quick and the Ed has the best critique of the plan I have seen so far, but those that only have a spare minute or two may find the following comparison helpful:
Comparing Student Loan Plans
| Direct Loan Program | Federal Family Education Loan Program | Sallie Mae Counter-Proposal | |
|---|---|---|---|
| Origination
(Making the loan) |
The student does not have multiple lenders to choose from. | Schools recommend lenders to students, who can choose which lender to use. Rates and terms for the loans are virtually identical, and schools often have interests in lenders that have nothing to do with the services that they provide to students. | Schools can choose between offering DLP loans or having two or more lenders make loans to students. All loans would have the same terms. Lenders would collect a fee from taxpayers for originating the loan. |
| Financing (Who pays?) | Federal funds are used to make loans directly to students. | Private loan companies use their own money to lend to students. If students default on their loans, the government pays. The government also gives companies subsidies to encourage lending. | Lenders would make the loans with their own money, sell it to the government, and collect a fee. |
| Servicing (Who makes sure that the student pays?) |
A competitive bidding process is used to determine which companies will service the loans.
If the student doesn’t pay and the loan defaults, the federal government hires a collections agency. |
The lender that originates the loan either services it or sells it to another company that services it (which can sell it again, and so on).
If the student doesn’t pay, a guarantee agency, or non-profit agency often tied closely to lenders, buys the loans from the lender, and tries to collect from students. If that doesn’t work and the loan goes into default, the government pays the guarantee agency to pay a collections agency to get the student to pay back the loan. |
Lenders that originate loans have the right to service them. This essentially means that lenders can find a way to avoid the competitive contracting process in the DL program, and the oversight that comes with it.
If the student doesn’t pay, a guarantee agency buys the loans from the lender, and tries to collect from students. If that doesn’t work and the loan goes into default, the government pays the guarantee agency to pay a collections agency to get the student to pay back the loan. |
| Costs to Taxpayer | Using this program for all new federal loans would save taxpayers $87 billion over the next 10 years | Continuing this program would cost taxpayers $87 billion over the next 10 years | The latest CBO estimate shows that the SLM plan would save $4-8 billion less than SAFRA. |
| Corruption | Corruption has not been a problem in the DLP | Susceptible to corruption and special interest lobbying because it is difficult to oversee, and because subsidy rates are set by Congress. | The plan maintains the problematic relationship between loan companies and financial aid offices, which has led to widespread corruption. It would also be more difficult for the Department of Education to provide comprehensive oversight, compared to SAFRA. |
| Misc. Problems | The program is on life support—after massive disruptions in the market, the government had to pass emergency legislation allowing the department to finance new loans made by lenders. This legislation will expire this summer, effectively ending the program with or without the passage of SAFRA. | Maintains many of the problems inherent in FFELP, including the fact that Guarantee Agencies are responsible both for preventing default, and collections, which is a conflict of interest. |