Q: What are the most important changes to student aid programs enacted by HCERA?

A: Starting July 1, 2010, all new federal education loans, including Stafford, PLUS and Consolidation loans, will be made through the Direct Loan program. The Congressional Budget Office (CBO) scored the legislation in March 2010 as saving $68 billion over 10 academic years (11 fiscal years). This savings was used to justify a $40 billion increase in funding for the Pell Grant program, $21 billion in deficit reduction, and spending on several smaller programs.

Q: Is this legislation the same as the Student Aid and Fiscal Responsibility Act (SAFRA)?

A: The original version of SAFRA (HR 3221) passed the US House of Representatives on September 17, 2009 by a vote of 253 to 171. Passage in the Senate would normally require a 60 vote majority. However, a parliamentary option called “budget reconciliation” permits passage with only a simple majority of 51 votes. Action in the Senate was delayed in order to preserve the use of budget reconciliation as an option for passage of health care reform. The delays lead to a re-scoring of the legislation, leading to $20 billion cut in the savings attributable to the mandatory switch to direct lending. That, in turn, forced Congress to drop several provisions from the SAFRA legislation to save money.

Q: Why was budget reconciliation necessary?

A: The U.S. Senate did not have the 60 votes necessary to pass the legislation without budget reconciliation. Senators with lender facilities in their states were concerned about the potential job loss. The legislation ultimately passed the U.S. Senate 56 to 43 and the U.S. House of Representatives 220 to 207 on March 25, 2010.

Q: Why was the student loan bill paired with the health care reform legislation?

A: There can be only one reconciliation bill per budget cycle. The Senate leadership knew that they would probably need budget reconciliation to pass both bills. In addition, the savings from the student loan bill would help ensure that the combined bill reduced the deficit, a prerequisite for any budget reconciliation legislation. Finally, the student loan bill was very popular in the U.S. House of Representatives, bring several votes to the combined measure.

Starting July 1, 2010, all new federal education loans, including Stafford, PLUS and Consolidation loans, will be made through the Direct Loan program.

Q: What provisions were dropped from the final version of SAFRA?

A: The major provisions that were dropped included the Perkins loan expansion and reengineering and the indexing of the maximum Pell Grant to 1% over the inflation rate. Funding for the College Access Challenge Grant program was cut from $3 billion to $750 million and the Community College funding was cut from $10 billion to $2 billion. Funding for elementary and secondary education was eliminated. Finally, the additional FAFSA simplification changes were dropped. These included replacement of the 6 asset questions with a net asset cap on eligibility for need-based federal student aid and the elimination of 12 of the untaxed income and benefits questions.

Q: Does passage of this legislation mean all colleges need to switch to Direct Lending now?

A: Yes. The legislation is final. If a college wants its students to have access to federal education loans starting July 1, 2010, the college needs to switch to the Direct Loan program now without delay. Switching to the Direct Loan program may involve changes to administrative software systems, staff training and student publications.

Q: Is technical assistance available to help a college switch to the Direct Loan program?

A: The HCERA legislation included funding for the US Department of Education to provide technical assistance to colleges who are switching to the Direct Loan program. U.S. institutions who need help should call 1-800-848-0978 or email DLEnrollment_FSA@ed.gov.

Foreign institutions should call 1-202-377-3168 or email FSA.Foreign.Schools.Team@ed.gov.

The National Direct Student Loan Coalition, a group of colleges already in the Direct Loan program, is also providing assistance. Visit www.directstudentloancoalition.org for more information.

Q: Does the switch to Direct Lending affect existing loans?

A: No. Existing FFELP loans will remain with the lenders unless the borrowers consolidate their loans into the Direct Loan program. All borrowers may consolidate into the Direct Loan program even if they have previously consolidated in the FFEL program.

Q: What are some of the key practical differences in the Direct Loan program from a borrower perspective?

A: The interest rate on the Direct Loan version of the PLUS loan (both Parent PLUS and Grad PLUS) is lower and the approval rate is higher. The PLUS loan has a 7.9% interest rate in the Direct Loan program, compared with the 8.5% interest rate in the FFEL program. The Stafford loan is essentially identical in both programs.

Student and parent borrowers in the Direct Loan program obtain their federal education loans from the college’s financial aid office instead of having to find a lender. After the borrower signs the Master Promissory Note (MPN), the college will be able to pull down the loan funds directly from the U.S. Department of Education. The Direct Loan program gives colleges more administrative responsibilities, but also gives them more control over disbursements.

Q: Why is the interest rate on the PLUS loan lower in the Direct Loan program?

A: The Higher Education Reconciliation Act of 2005 (HERA), enacted as part of the Deficit Reduction Act of 2005 (PL 109-171, 2/8/2006), increased the interest rate on the PLUS loan from 7.9% to 8.5% effective July 1, 2006. (The Stafford loan interest rate was scheduled to switch to a fixed rate of 6.8% and the PLUS loan interest rate to a fixed rate of 7.9% on July 1, 2006 by legislation enacted in 2002 (PL 107-139, 2/8/2002).) Due to a legislative drafting error, the increase were applied only to the FFEL version of the PLUS loan. The Direct Loan version of the PLUS loan remained at 7.9%.

Q: Why is the PLUS loan approval rate higher in the Direct Loan program? Don’t both programs use the same adverse credit history criteria?

A: The eligibility requirements for the PLUS loan require borrowers to not have an adverse credit history. An adverse credit history is defined as having a current delinquency of 90 or more days on any debt or a five-year lookback for certain derogatory elements of the credit history, such as bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment or default determination.  Some FFELP lenders have incorrectly used a five-year lookback for 90-day delinquencies, instead of just a current 90-day delinquency. This is not a violation of the regulations, as the regulations at 34 CFR 682.201(c)(2)(iii) permit lenders to adopt more stringent credit underwriting criteria. But it is an error that increases the denial rate significantly. Analysis of 2007-08 data from the National Postsecondary Student Aid Study shows a Parent PLUS loan denial rate of 42% in the FFEL program and 21% in the Direct Loan program.

Q: Will current borrowers benefit from the lower interest rate on the PLUS loan in the Direct Loan program?

A: The switch to the Direct Loan program affects only new loans. Existing PLUS loans in the FFEL program will be unchanged. Consolidating a FFELP PLUS loan into the Direct Loan program does not change the underlying interest rate on the loan.

Q: Who will be servicing the loans in the Direct Loan program?

A: The U.S. Department of Education awarded servicing contracts to four FFELP lenders, who began servicing new Direct Loans in August 2009. These contractors are Sallie Mae, Nelnet, PHEAA and Great Lakes. Borrowers are assigned randomly to the servicers to permit an apples-to-apples comparison of servicing performance without regard to demographic differences among the borrowers. Servicing performance includes default aversion, and customer service surveys completed by borrowers and colleges. Servicing volume will be adjusted according to servicing performance. In addition, HCERA earmarked servicing contracts for up to 100,000 borrowers total in each state to certain non-profit state servicers.

The maximum Pell Grant will remain flat at $5,550 from 2010-2011 through 2012-2013, then it will be indexed to the Consumer Price Index (CPI-U) inflation rate from 2013-2014 through 2017-2018, and then it will remain flat from 2018-2019 through 2019-2020.

Q: Borrowers could end up with three different types of loans each of which must be serviced separately: FFELP loans, FFELP loans sold to the US Department of Education through the ECASLA legislation, and Direct Loans. Does HCERA include any options to help borrowers simplify the repayment process?

A: Borrowers with loans in at least two of these programs may consolidate their loans while they are still in school from 7/1/2010 to 6/30/2011. The interest rate will be the weighted average of the interest rates on the loans being consolidated, without the usual rounding of the interest rate to the nearest 1/8th of a point.

Most borrowers should not use this provision as they will lose the remainder of the six month grace period on their loans. There is no real benefit to consolidating loans while they are in school, as the interest rates on federal education loans made since 7/1/2006 are already fixed. The financial benefit of avoiding the rounding up of the interest rates by 1/8th of a point is negligible. Many borrowers will need their six month grace period in the current difficult job market. Moreover, borrowers can simplify the repayment process by consolidating their loans after they enter repayment.

Q: How is the income-based repayment plan changing?

A: The HCERA legislation implements President Obama’s proposal to improve the income-based repayment plan. It cuts the monthly payment by one-third from 15% of discretionary income to 10% of discretionary income. It also accelerates the forgiveness of the remaining loan balance from 25 years to 20 years. These changes are effective for new borrowers of new loans made on or after July 1, 2014.

Q: Is public service loan forgiveness changing?

A: No. Public service loan forgiveness will still forgive the remaining loan balance after 10 years of full-time employment in a public service job when the federal student loans are repaid in the Direct Loan program.

Q: Will current borrowers benefit from these changes?

A: No. The changes are not retroactive. Current borrowers will continue to use the current income-based repayment program, however, which is still a pretty good safety net for borrowers who are experiencing financial difficulty.

Q: Some people have called the HCERA legislation the “single largest investment in college aid ever,” noting that it invests $36 billion over 10 years to increase the maximum Pell Grant. But you have called the increases in the maximum Pell Grant anemic. Who’s right?

A: The American Recovery and Reinvestment Act of 2009, the stimulus bill, increased the maximum Pell Grant to $5,350 for the 2009-10 academic year. This was a one-time increase, valid only for one academic year. In addition, Congress underestimated the number of applicants who would qualify for the Pell Grant, leading to a funding shortfall. Most of the increase in funding for the Pell Grant program will be used to backfill the funding shortfall and to maintain the stimulus bill’s increases in the Pell Grant more permanently.  Unfortunately, this leaves very little money for increases in the Pell Grant beyond the $5,550 maximum grant for the 2010-11 academic year.

The maximum Pell Grant will remain flat at $5,550 from 2010-2011 through 2012-2013, then it will be indexed to the Consumer Price Index (CPI-U) inflation rate from 2013-2014 through 2017-2018, and then it will remain flat from 2018-2019 through 2019-2020. The projected maximum Pell Grant will be $5,975 in 2019-2020, only $425 more than the maximum Pell Grant in 2010-2011. This yields an average annualized increase of CPI-U minus 0.75%. Thus the increases in the maximum Pell Grant are anemic and will not keep pace with inflation. This falls short of President Obama’s proposal for indexing the maximum Pell Grant to CPI-U plus 1%, as was passed by the U.S. House of Representatives in September 2009. It also does not eliminate the feast/famine cycles that have lead to an unchanged maximum Pell Grant for years at a time, as happened for four years during the Bush administration.

Q: If Congress hadn’t passed HCERA, would the maximum Pell Grant have been cut in half as some people have said?

A: If Congress hadn’t passed HCERA or otherwise backfilled the Pell Grant funding shortfall, the maximum Pell Grant would have been cut severely in 2010-2011. The Pell Grant program is an academic year program that runs from July 1 to June 30. This spans two federal fiscal years, which run from October 1 to September 30. When appropriations for the Pell Grant program fall short, the U.S. Department of Education can “borrow” from the second fiscal year’s appropriations to help fund the shortfall. When the shortfalls are relatively small, the U.S. Department of Education can continue in this manner for several years before Congress has to pass a supplemental appropriation to eliminate the shortfall. This time, however, the funding shortfall was large enough that it would have required cutting the next year’s maximum Pell Grant.

Q: How will the EFC cutoff for Pell Grant eligibility be affected?

A: The expected family contribution (EFC) eligibility cutoff will be based on 95% of the overall maximum Pell Grant, as opposed to just the discretionary maximum. The EFC eligibility cutoff for 2010-2011 will be $5,273, up from $4,617. Students with an EFC less than this threshold will qualify for a Pell Grant.  This should increase the number of Pell Grant recipients by about 240,000.

Q: Will the Pell Grant now be a true entitlement program?

A: Unfortunately, no. The Pell Grant is still funded through a combination of discretionary and mandatory funding, so it is still not a true entitlement program. Entitlement programs are funded with only mandatory funding.

Since the Pell Grant is not a true entitlement, it is possible that the maximum Pell Grant could be cut as it was in 2008, when the maximum Pell Grant was cut from $4,800 to $4,731 due to an across-the-board budget cut. Such a scenario is likely given the prospect of big budget deficits for the next several years.

Q: How does the Direct Loan program save money over the FFEL program?

A: The Direct Loan program saves money for three main reasons. First, the federal government has a lower cost of funds than FFELP lenders. The federal government can borrow at Treasury rates, which are currently very close to 0%. This yields a competitive advantage to the Direct Loan program. Second, by “eliminating the middleman” the federal government gets to keep more of the spread from the federal education loans for itself. These loans are profitable, despite being made to borrowers without any collateral and without regard to credit quality, in part because of the federal government’s strong powers to compel payment of defaulted loans. Proponents of the Direct Loan program also argue that the government bears the risk of default and so should derive all of the financial benefits. Third, economies of scale permit more cost-effective servicing of loans, since fewer lenders will be servicing loans. The U.S. Department of Education’s contracts with the four servicers pay the servicers about one third less on a unit basis than the lenders had previously charged for servicing in securitizations of their own FFELP loan portfolios. The servicing contracts pay even lower rates for borrowers who are in a deferment or forbearance, delinquent or in default.

Q: Why did the Congressional Budget Office (CBO) reduce the savings estimate?

A: When the CBO originally scored the legislation in February 2009, it estimated savings of $87 billion. This figure dropped to $68 billion when the legislation was rescored in March 2010, a $20 billion decrease. Most of the decrease, however, was due to colleges switching to the Direct Loan program on their own in anticipation of the expiration of the ECASLA liquidity provisions and uncertainty about the future of the FFEL program. The federal government is still realizing the savings from these colleges switching to the Direct Loan program, but the legislation cannot claim credit for the savings.

Q: How realistic are the savings estimates? Is the Direct Loan program really going to save money over the FFEL program?

A: It is easy to quibble over the savings estimates, in part because the estimates are extremely sensitive to economic assumptions. The CBO scoring also does not consider market risk and a variety of other factors, so it overstates the savings. The actual savings will probably be much closer to the estimates prepared by the Office of Management and Budget (OMB).

Regardless of which savings estimate one uses, the Direct Loan program will still save billions of dollars more than the alternatives. It is very difficult for Congress to ignore an opportunity to increase spending on student aid at no cost to the taxpayer. Congress decided that this was more important than saving several thousand FFELP jobs and avoiding the unknown potential for disruption during the transition to the Direct Loan program.

The accuracy of the CBO estimates does not matter in the strange calculus that operates on Capitol Hill. The CBO estimates may be flawed, but at least they are nonpartisan, and they provide the justification for increased spending on student aid. CBO estimates were used in the Higher Education Reconciliation Act of 2005, when Republicans dominated Congress, just as they are used in the Health Care and Education Reconciliation Act of 2009, when Democrats dominate Congress.

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Mark Kantrowitz is the Publisher of FinAid.org and FastWeb.com

The Senate passed the bill by a 56-43 vote.  Last night, the House passed the bill by a 220-207 vote.

The primary and most controversial higher education component of this bill, the Health Care and Education Reconciliation Act of 2010, is the elimination of the Federal Family Educational Loan Program (FFELP).

All federal student lending will be shifted away from FFELP, which provided subsidies to banks for them to provide student loans, to the Direct Loan program.

Here’s an interesting article from Inside Higher Ed discussing the winners and losers from these reforms.  Here’s a good summary of the bill’s student aid provisions in this NASFAA article.

In addition to terminating the authority to make loans under the FFEL program, Title II, Part A of the Amendment to H.R. 4872 would fund expansions of existing HEA programs and benefits, including the Federal Pell Grant program, the William D. Ford Federal Direct Loan (DL) program, programs serving Historically Black Colleges and Universities (HBCUs) and other Minority-Serving Institutions, and the College Access Challenge Grant program. It would also amend the income-based repayment (IBR) plan.

….

This report reviews and briefly describes the proposals contained in the Amendment to H.R. 4872, particularly those which amend programs authorized under HEA. It will be updated as warranted to track legislative developments.

The President’s budget includes the following provisions:

Student Aid and Fiscal Responsibility Act of 2009

Supports the Student Aid and Fiscal Responsibility Act of 2009 (SAFRA), which has passed the House but is still pending in the Senate. This legislation includes a switch to 100% direct lending, indexing the Pell Grant to CPI + 1%, the four-fold increase in Perkins loan funding, and the $3.5 billion College Access and Completion Fund.

Pell Grants

Increases the maximum Pell Grant by $160 to $5,710 in 2011-12, with the maximum grant indexed to CPI + 1% thereafter. A total of $34.878 billion in funding will be awarded to 8,743,000 students with an average grant of $3,984 (up from $3,865 in 2010 and $3,646 in 2009). Proposes making the Pell Grant a true entitlement with 100% mandatory funding.

Flat Funding of Some Programs

Flat funds SEOG, FWS, TRIO, Upward Bound, GEAR UP, Javits fellowships, GANN, Thurgood Marshall Legal Educational Opportunity Program, and Child Care Access Means Parents in School.

Note that the American Recovery and Reinvestment Act of 2009 (stimulus bill) included $200 million for FWS that was a one-time event.

Eliminates Some Programs

Eliminates LEAP, Byrd scholarships, B.J. Stupak Olympic Scholarships, and loan repayment for civil legal assistance attorneys. (As part of the Perkins loan reengineering, subsidized interest and loan cancellation provisions for the Perkins loan program will be eliminated.)

TEACH Grants

TEACH grant funding will increase to $93.2 million from $79.8 million. The Department estimates 80% of TEACH grants will not fulfill their service requirements, and treats the TEACH grants as a 100% forgivable loan on its books.

Sunsets Some Programs

The Academic Competitiveness and National SMART Grants sunset at the end of 2010-11 and will not be extended.

Direct Lending

The budget estimates the savings from 100% Direct Lending at $45.6 billion through 2020, down slightly from OMB’s previous estimate of $47.5 billion. (OMB’s estimates are closer to reality than CBO’s estimates. But the fact that OMB’s estimate did not change much suggests that any CBO rescoring of SAFRA is unlikely to change by much.)

The following table shows the percentage distribution of loan volume in 2008-09 and 2009-10, derived from the budget’s figures.

So the US Department of Education funded 88% of federal education loans in 2008-09 and 85% in 2009-10, 87% overall.

The budget projects a lower life of loan overall default rate in the Direct Loan program than in the FFEL program for 2010 for the first time, 16.81% vs 17.77%. These figures probably include the ECASLA loans with the DL loans.

Total new federal education loan volume, not including consolidation loans, will exceed $100 billion for the first time in FY2010.

American Graduation Initative

American Graduation Initiative to improve and modernize community colleges with the goal of graduating 5 million more students by 2020. Provides $10.6 billion in funding over 10 years.

Income-Based Repayment Program

Modifies the income-based repayment program by changing the percentage of discretionary income from 15% to 10% and the loan forgiveness from 25 years to 20 years. (Public service loan forgiveness remains unchanged at 10 years.)

Education Tax Credits

Although they are not part of the US Department of Education’s budget, provides FY2011 estimates for the Hope Scholarship tax credit ($11.4 billion), Lifetime Learning tax credit ($3.4 billion), and student loan interest deduction ($1.1 billion).

Total Funding

Total funding for student aid is $173 billion.

The following table compares the proposals for major student aid programs with actual appropriations for FY2009 and estimated appropriations for FY2010. (Although Congress is supposed to pass the budget before the start of the fiscal year, some of the spending bills are still pending.)

Additional details can be found on pages 382-406 of the education appendix to the President’s budget. Material of special interest includes summaries of the aid funds available, number of aid awards and average aid awards on page 383, and loan volume, number of loans, average loan size, default rates, and program cost rates on pages 391-393.

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Mark Kantrowitz is Publisher, FinAid.org

Introduction and Background

What’s the big deal on who makes student loans—the government or the private sector?  Should colleges and universities care?

That is the debate before the Congress this fall with most in the higher education community having concluded that the government program—called Direct Loans—will soon be the single provider of federal student loans.  Many see it as a “big deal” because the Obama administration has promised its proposal will “save” a full $87 billion over ten years—most of which it will “reinvest” in a plethora of education initiatives, including increased student grants.

The attraction of producing huge budget savings in a time of mounting deficits is obvious.  But, like many things that seem too good to be true, there is more to this proposal than meets the eye.  Things like declining service quality, increased federal intrusion into institutional governance, and higher defaults, for example.

Superficially, at stake is the future of the program where the private sector makes loans but the government guarantees them—known as the Federal Family Education Loan program or “FFELP.”  This program has few friends following years of scandal (both real and artificial) and complaints from both the right and left that it costs too much while enriching loan providers with the government bearing all the risk.  All of this has caused many schools to say “good riddance” to FFEL but, curiously, about seven in ten, have until recently stuck with the program.

This anomaly begs a question:  Why?

Where are We Now?

But first, where are we now?   The answer is that the Obama administration is now fighting aggressively for the enactment of the Direct Loan program. It both “wants the savings” to fund major parts of its education agenda and, simply put, “wants a win.”   Should its health care reform proposal be defeated or substantially watered down, student loans could become the single largest domestic policy triumph of the new administration.

That’s no small deal and it should surprise nobody that Congress is well on its way to enacting the proposal.  Under it, student loans would be made with Treasury funds and serviced by contractors managed by the U.S. Department of Education.

From a student perspective, the administration says, the program will be pretty much unchanged.   In fact, the administration suggests that its “single payer” approach (as you might have guessed, they don’t call it that) is simpler than the FFEL program.

A compelling case?  Why would a university not support the President’s proposal?  Basically there are three reasons.

Three Reasons for University Opposition

Reason 1

First, there is the issue of service.  Funding for the administration of the Direct Loan program is subject to annual appropriations.  It is highly unlikely to be upgraded absent any option for borrowers to go elsewhere.  In fact, because funding for administration will compete directly for funding with Pell Grants and other student aid, some have suggested that existing service quality on Direct Loans will start a gradual movement towards mediocrity or worse as soon as the legislation is enacted.

Importantly, the issue of service quality is not a matter of how easy the life of a financial aid administrator or borrower can be made.  Rather it can be the difference between a borrower paying back her loan or defaulting on it.  To paraphrase a credit card commercial, the default is priceless—it is impossible to put a price tag on the harm done to a borrower who defaults.

At the heart of the service quality concern is the elimination of the FFEL guaranty agencies.  These entities perform a variety of services in support of FFEL borrowers, the most important of which is attempting to help borrowers who find themselves in delinquency avoid default.  Services consist of counseling borrowers through the complex array of repayment options available to them.

Under the President’s proposal default aversion services are to be “built into” the contracts with loan servicers—in essence paying entities that have already failed to prevent a borrower from going into delinquency to try again.  FFEL guaranty agencies, in contrast, are a “fresh set of eyes and ears” on an account and are more likely to find opportunities for default aversion that the loan servicer will miss.

Reason 2

The second reason is the issue of federal intrusion into institutional governance.  “He that pays the piper calls the tune.”  The piper will be the government.  The tune will be anything to reduce or control the cost of student aid.

Please note that this concern is not yet prominent in the public debate.  Some schools, however, appear to be keenly aware of it.  As they see it, once a single payer is responsible for all student loans, the only way to cut federal costs associated with the program without increasing costs to borrowers is to improve student outcomes (a good thing) or to impose cost controls on schools.

As is the case with predictions for bureaucracies interfering with quality health care  should a “public option” be created, nobody really knows what the long-term consequences for institutional independence will be for the enactment of a federal monopoly for student loans.  Logic, however, suggests that budgetary pressures on student aid will increase dramatically as the federal debt grows and higher education costs continue to rise at a rate far eclipsing the normal consumer price index.

“Higher Education Cost Containment” could take a variety of forms.  To name just a few, greater federal intervention in who gets admitted and how the admissions process is carried out.  The stated goal would be to reduce the recruitment of students with a greater likelihood of not being able to repay their loans.  Also possible is the elimination of eligibility for student aid of programs that “don’t make economic sense.” Before nodding in agreement, think about the market for medieval historians.  Also possible are federal guidelines for what services and programs may be offered to students.  To paraphrase Richard Vedder, why should federal student aid dollars fund a “country club” environment on campus?

Faced with public scrutiny on “the value proposition,” many colleges may be characterized as abusing students or as “wasteful.” Many schools will survive this vilification, but for some struggling independent colleges, the bad PR will hurt student recruitment at a time when costs pressures are already undermining their competitiveness.

Reason 3

A third issue is reliability.  In FFEL, reliability has been a function of redundancy.  If one lender quit or provided unsatisfactory service, there were ten others waiting to work with the borrower and school.  In a Direct Loan monopoly, this redundancy is eliminated.  If the Direct Loan program fails, loans simply won’t be available.

How likely is that to happen?  If the past is prologue, the answer would have to be “likely” because the Direct Loan program has already been subject once to a catastrophic collapse.  It happened in 1997 when the demand for Direct Consolidation Loans exceeded the capacity of the Department’s contractor.  The “melt-down” resulted in the need for the enactment of “bail out” legislation allowing borrowers to go to private sector lenders for loans.

In addition to this “ancient history” one can also look to events today in the United Kingdom.   Every day new horror stories are emerging on delayed loans and poor service resulting from what is viewed (at least across the pond) as an ill-timed decision to turn student loans over to a single government payer.

Conclusion

One last thought:  Charging the Department of Education to be a bank is a mistake.  It is unlikely to have the  “band width” to competently run a $100 billion a year loan program and to execute  it’s more important functions of leading reform in elementary and secondary education, securing the educational rights of students with disabilities, promoting literacy, and, yes, overseeing the quality of higher education through its role in recognizing accrediting bodies.

These are legitimate questions that will be shrugged off by some but which raise questions about whether the government should be providing services that can be provided better in the private sector.  Put another way, if Congress sought to control the cost of higher education by creating a “public option” or worse yet, “federalizing” all institutions of higher education as a means of directly influencing both efficiency and quality, the academy’s outcry would be deafening.

Admittedly, a specific proposal to impose new, intrusive regulation over schools has yet to surface.  The possibility, however, is more than pure speculation.  The Department has already proposed limiting eligibility for certain occupational training on the basis of its assessment of the “value proposition” inherent in the student enrolling in the program and paying for it with loans. Also notable is the inclusion in SAFRA (The Student Aid and Fiscal Responsibility Act) of provisions directly funding provides community colleges (and not to other sectors).

Fifty years from now, the decisions being made today on student loans could be seen as a tipping point—a major step towards increasing federal intrusion into institutional governance.  The $87 billion in savings (a number, by the way, identified as overstated by over $30 billion by CBO’s own budget director) will be forgotten.

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John E. Dean, is principal in Washington Partners, LLC, a public affairs firm.

From NCES:

“Key findings include the following:

• About 36 percent of 1999-2000 bachelor’s degree recipients received at least one Pell Grant while in college.
• Higher percentages of Pell Grant recipients had at least one of several undergraduate risk characteristics (e.g., delaying postsecondary enrollment or failing to graduate from high school) than did nonrecipients.
• Parents’ education was the only factor consistently related to both time-to-degree and graduate school enrollment for Pell Grant recipients. Those whose parents did not attend college took longer to attain a bachelor’s degree and enrolled in graduate school at lower rates than recipients whose parents had a least a bachelor’s degree.
• Although Pell Grant recipients had a longer median time-to-degree than nonrecipients, when controlling simultaneously for parents’ education, undergraduate risk characteristics, and transfer history, recipients had a shorter time-to-degree than nonrecipients.”

The Department of Education released this press release on the study.

It is doubtful that the legislative opponents of Obama’s plan will be thrilled with this action.  It may even anger some proponents.

A coalition made up of lenders and others in the loan industry came out this week and proposed an alternative to Obama’s plan.  The coalition is called America’s Student Loan Providers.  From the proposal:

The Student Loan Community Proposal endorses the core principles of the Administration’s reform effort — using federal funds to guarantee the stability of student loan financing, eliminating subsidies to private lenders, and generating historic savings for student financial aid — while maintaining choice, competition, superior service for students and schools and preserving tens of thousands of local jobs in all 50 states.

Regardless of what happens on these questions about student loan reform, the Administration has made itself look arrogant in its actions.

There are plenty of different views on student loan reform, such as provided by Dr. Richard Vedder in recent House testimony.  The Executive Branch shouldn’t have disrespected Congress by jumping the gun.