The Wisdom of Solomon
This post was written by Dave Gruen
March 23, 2009 6:18 pm Loans, NCI, ObamaOK. It’s hit the streets and everyone has an opinion. So, where’s King Solomon when you need him?
NASFAA took a bold step this past week in putting forward a radical proposal/concept of how to restructure the federal student loan programs. As you are no doubt aware, the Obama Administration has proposed originating and processing all student loans through the Federal Direct Loan Program beginning July 1, 2010. This is a concern for many of the 70% of colleges and universities that use the Federal Family Education Loan Program.
NASFAA has learned from Congressional aides, the Obama Administration and representatives from education associations in D.C. that continuing the FFELP, in its current form, is not a viable option. And, there has been talk that the budget proposal to kill FFELP could be put on the Budget Reconciliation fast-track, essentially assuring the establishment of FDLP as the single loan program.
Is the administration’s proposal for FDLP or maintaining the current FFELP really our only options? Based on nearly 5,000 responses from NASFAA members during National Conversation Initiative (NCI) town hall meetings, members feel that the current student loan system isn’t perfect leaving room for improvement. Was NASFAA only hearing from members who are dissatisfied? We all know that those who are most dissatisfied about the current state of affairs are also the most vocal. I believe that it’s time to have a civil, dispassionate and professional debate on the merits of all student loan options. Just because FFELP and FDLP are the current options, doesn’t necessarily make either the best option going forward. All indications suggest that there will be significant changes made to the student loan system. I It seems likely that whatever loan system is eventually implemented, it will likely be with us - and more importantly with our students - for a long time. This makes it imperative that we be in the discussions to help get it right.
The NCI town hall meetings provided an opportunity for all of us to have input in the future of the federal student aid programs. The NCI process has prepared our profession - through NASFAA - to be “at the table” and discuss what is best. The proposed loan concept is a starting point for discussion of viable options to the current programs. Perhaps neither FFELP or FDLP is the perfect program, and it is likely that there is a better way to provide student loans to meet the needs of students, parents, and taxpayers.
Please share your thoughts and read what others have to say. This is the culmination of 15 years of very passionate debate regarding FDLP vs. FFELP. Keep in mind that we must do what is in the best interests of our students – not what is best for our schools or the government. Your input is vital for the leadership of NASFAA to effectively represent our membership in the discussions to come. Hopefully the ‘Wisdom of Solomon’ will shine through.
March 24th, 2009 at 7:09 am
Here’s my concerns with the elimination of FFEL - disclosure, I work for the Student Loan Network, a FFEL originator, and therefore probably hold a bias - the Department of Education right now is able to barely service the loans it holds. I should know, since I have $19,000 in grad Staffords from my days at BU and service is less than stellar already.
What in the world makes the Department think it’s capable of rapidly scaling up to 4x its current volume?
Second, the plan as outlined by the President says it’s taxpayer friendly and job neutral - except that it makes the assumption that everyone in FFEL will somehow find a place in servicing only after FFEL is eliminated. How in the world does that make sense, if you eliminate all the guarantors?
Third, I disagree that this is an either/or. I’d like to see FFEL and DL merged together - so that in bad times, no school will ever be without a lender (the Department) and in good times, no student will never be denied better potential borrower benefits as we saw in FFEL during 2003-2006. Flatten out the program to a simple guaranteed student loan program, keep subsidies rational now that we know what the free market has decided when it comes to students, risk, and private student loans, and focus government resources - and school resources - on the areas of highest critical need.
March 24th, 2009 at 7:42 am
Once we have a government monopoly on federal student loans we will have elminated two things: competition and the incentive to improve. These are the cornerstones of a private sector economy, so much so that throughout our history the government has regulated against monopolies. There may be competition for servicing contracts and financial literacy programs, but the selection will be made on the basis of cost and not necessarily quality. If there are problems in the federal student loan system, they will be addressed by politicans looking to score points with voters. The system could be vulnerable to political interference that will create as much confusion as volatile financial markets. This is the heart of the dilemma: given the current state of the economy, who can defend banks or praise the workings of financial markets Private sector student loan lenders did not create the asset backed security mess, but they were deeply involved in a risky system that imploded. After years of efforts to identify the best FFELP lenders for my heavily indebted medical students, I must now report to them that their loans will be sold to the federal government. How do we defend a system that brought us to this point? And yet, who can be optimistic that a government monopoly will be any better for young people entering upon the first major financial transactions of their lives.
March 24th, 2009 at 8:04 am
I am a Financial Aid Director at a
small school in Massachusetts and
a “one person shop” and have been aid for 34 years. I feel everyone is
entitled participate in whicher program they perfer FFEL or DL. I have chosen FFEL as I feel they
service my 500 student’s very well.
To force me go to Direct Lending
might hasten my chances of retirement.
March 24th, 2009 at 8:10 am
The past few years have seen the elimination of many “lender subsidies” with a certain amount of those funds re-routed to student grant programs. Aid administrators are always grateful for student grant dollars, but the new grant funding does not tell the whole story. Are all students truly better off? Are interest rates of 6.8% and 8.5% really benefiting students and parents? Have all of the eliminated “lender subsidies” been re-routed to grant programs?
I will speak on behalf of the students with whom I work. With the elimination of “lender subsidies” and the resulting elimination of most borrower benefits, our students now pay significantly more for their loans – a change affecting all students – need-based and non-need based.
Maybe a staged approach to change where the best of FFEL and DL could be achieved would be more prudent. Maybe retaining multiple funding sources that maintains the tension between competing loan programs that leads to better benefits and services for students would be wise. Maybe a single delivery platform for both loan programs allowing access to both loan programs for students on all campuses would maintain the best choice for students. Maybe finding a way to keep private capital infused into the loan program would be wise in these days where there are so many demands on public capital.
Maybe seeking a long term solution where experience and trusted service providers are retained would better serve a nation of students searching for ways to access a college education in the face of the credit crunch.
The National Debt will be increased by $1 Trillion dollars over the next 10 years if Direct Lending is implemented.
• The entire cost of a Federal Direct Loan Program (DL) is not apparent. The exclusion of administrative costs from calculations gives a noticeable advantage to DL compared FFELP costs. Subsidy cuts to lenders are also not fully considered.
• Taxpayers lose more money when a student defaults on a DL than a FFEL loan. Taxpayers fund 100% of a DL default while only 90-95% for FFEL loans.
• According to Inside Higher Education, every $100 of FFEL loans issued during FY08 cost the government $1.72, while every $100 of DL loans cost $4.26.
• The current FFELP loan volume is approximately $65 Billion. Without FFELP, the US Treasury will lend approximately $65 billion more, potentially adding $100 billion to the federal deficit through increased DL.
FFELP lenders, servicers and guarantors provide programs and assistance to students and institutions on default prevention, debt management, college access and outreach services.
• At a time when default rates will increase due to a change in the calculation authorized by HEOA, is it wise to remove FFELP players from the scene?
• FFELP lenders, servicers and guarantors tailor programs on default prevention and debt management to institutions who have high default rates.
• FFELP partners provide workshops, presentations, loan counseling, financial literacy, career exploration, outreach programs, need-based scholarships, funding for college access, and research to improve the retention of low income students.
• FFEL lenders, servicers and guarantors offer free and individualized default avoidance services to help keep borrowers on track during repayment. During FY2007 more than $52 billion in delinquent FFEL loans were resolved as a result of these types of services.
• FFELP partners offer borrower benefits such as interest rate reductions and loan forgiveness.
• Unemployment rates are soaring to record highs, making the need for default aversion activities and the education on repayment options more apparent.
Eliminating the FFEL partnership will mean the loss of at least 35,000 jobs nationwide, with a ripple effect on thousands more.
• With the nation’s unemployment rate rising to its highest level in over 25 years, this is not the time to eliminate thousands of jobs.
Having choice and competition among FFELP and DL is best for the student, taxpayer, and society at large. Current estimates have FFEL loan volume at 70% and Direct Loan (DL) volume at 30% for student loans made in the state of Missouri. The majority of colleges and universities in our state PREFER the FFEL Program. Colleges and their students have a choice, and an impressive majority has chosen FFELP (approximately 132 of the 154 schools in Missouri). Eliminating FFELP limits options and choice for students to find the best loan terms and conditions. FFEL lenders have continued to provide loans to all eligible students despite the economic and legislative challenges experienced over the last two years.
March 24th, 2009 at 8:52 am
Whether or not I agree with the proposed model in the NCI, having had a few days to put it into a context, I at least applaud NASFAA for attempting to get us refocused and away from the DL vs. FFELP Cold War, which continues to get uglier almost daily.
However, my fear is that we’re going to wind up with inertia. The FFELP industry simply has too many friends on Capitol Hill (on both sides of the aisle) for the Administration’s proposal (or NASFAA’s) to happen. And then we’ll be right back to where we are, meaning (and I’m trying to be impartial, which is difficult for me) we’ll continue to hear from FFELP advocates that Direct Lending = big bad inefficient government and increased office workload, and from Direct Lending advocates unhappy that the private sector will continue to receive subsidies from increasingly scarce resources and about the level of influence the FFELP industry has within our associations.
It’s become an awfully big and disheartening distraction from the stated purpose of financial aid associations.
March 24th, 2009 at 9:28 am
Thank you Daniel Burr for you well thought out democratic comments! Isn’t free enterprise, competition, and freedom of choice the foundation of America?
March 24th, 2009 at 10:06 am
I am an FAO in a small private university. 67% of our students use FFEL lenders with little complaint. At the end of each academic year, we create lender lists that are generated by ranking lenders from compiled errors kept during the year(we have lists for both FFEL & private). Lenders who do not attain a specific threshold of performance are removed from the list(s) and they must go through a 2-year rehab program to be relisted. Lenders have responded well to this program for years and service levels for our students are consistently high. I am concerned that moving to a FDLP will distribute the well documented functional problems of the WDF program to the 60% or so of schools not yet having to deal with those chronic service level issues. If discussions at the FSA earlier this year are indicative, students will be the unhappy beneficiaries of a lost financial support network that has well served the post-secondary marketplace for decades. Loss of choice is a slippery slope.
March 24th, 2009 at 10:21 am
My greatest concern is that the loan program, whatever form it takes, remain essentially private sector. It is not the role of government, nor is it provided for constitutionally to administer any form of financial support to the citizenry. Although I do support a mechanism that provides people an opprotunity to borrow funds for education in an effort to better themselves, and the federal government does provide a guarantee for this, the role of the government should be very, very limited. Even with its many flaws, the current system serves its purpose. The only change that would be reasonable, in my opinion, would be to make it less possible for individuals to obtain funding and then skip out on school.
March 24th, 2009 at 10:49 am
It’s time to stop the power grab by this Government body. So many of our economic problems today come from Government run programs. Why would we want them to have a monopoly on loans.
March 24th, 2009 at 2:38 pm
Recently, I was told that the call center for Direct Student loans was stationed in India & now in the Philippines.
Frankly I am appauled that our government is asking our student citizens to share their personal identification information with foreigners.
March 24th, 2009 at 2:41 pm
Where is the administration getting the capital from to fund the new DL program?
March 25th, 2009 at 6:53 am
I have yet to meet one kid who knew the difference between the lender, servicer, and GA; nor do they ever figure out their school is the lender for Perkins, HPSL, LDS and once a servicer is introduced into that, it’s another mess. If NASFAA needs clueless kids to testify on the Hill, I can find you plenty. A gradPLUS to them is a private/alternative loan most of the time. I will add that I work at a 1 stop shop DL grad school with FFEL certification of 220ish and the 40 kids I inherit annually are clueless. If you think the service they receive is stellar, I’d encourage you all to rethink that. It may be stellar for you as an FA person but one must be aware of the fact that you are the one bringing the business to the lender. Would I expect stellar service? Yup, since I’m the one helping you make money… My real estate agent was my best friend until I closed on the house, my car dealer the same, the cable folks as well. Once the deal is sealed, there’s not much they need to do for me.
I can assure you that the servicing for your grads is pretty pitiful but the homepages are pretty. I can think of 100’s of times they have called from my office to ask questions only to receive some bizarre answer which has given me plenty of opportunities to speak to the rep on their behalf. I get some whacky answers but expect to– it’s a job and not a career in loan servicing. It is the same in DL but perhaps students would have more of a clue if it was one entity and not 100 and the rules were consistent. I will also add that the likelihood of them consolidating to DL is about 99% when they enter repayment since they can’t deal with the 100’s of platforms and people, nor do they want to. It’s analogous to having your phone, internet and cable bundled and how many of you elected to do that?
If I had to give my opinion after this many years and kids, what students really want it’s simplicity. How many of my colleagues hear the word “consolidation” over and over still? There’s a clue in all that.
I’m not sure I get the NASFAA proposal entirely but I do like the idea of 1 loan program, 1 grant and 1 work study. I will fight for students and families to have choice: take a fed loan or don’t and if NASFAA wants to wage that one, I’ll be first in line.
If I could guess what FA folks want it’s the time to do the job the way it was meant to where it was you who became the “explainer” instead of the “pointer” to yet another homepage. It would also be easier to improve a program if there was only one to work on.
Last time I checked a lot of the banks got their capital from the feds anyway. Servicing for other lenders is offshore as well. The gov’t is not getting out of higher ed funding but perhaps they should.
Problem solved.
Oh wait, now that I think of it they kind of did that with the subsidy cut and didn’t all the banks decide they didn’t want to take part? Glad to see their commitment to the dream.
March 25th, 2009 at 7:55 am
On AMD’s comment:
“Oh wait, now that I think of it they kind of did that with the subsidy cut and didn’t all the banks decide they didn’t want to take part? Glad to see their commitment to the dream.”
The government removing lender subsidies without also removing its regulation of what interest rate and fees can be charged, repayment terms that can be offered, etc is hardly the government removing itself from higher ed funding.
Also, there’s more than just “banks” making loans for students. There are a lot of nonprofit and state-based lenders that do great things for students like offering scholarship, grant, and loan forgiveness programs. I guess those lenders don’t count?
March 25th, 2009 at 8:07 am
I think what has largely been lost in this debate is the fact that the President’s proposal makes available $94,000,000,000 in funding for Pell and other aid programs. If that can be done with no other impact on loans except that students no longer have to worry about which of the 2800+ lenders to choose from……..
For everyone who is supporting the continuation of the FFEL program, I suggest you go talk to one of the many schools who received letters from lenders last August telling them that they were being dropped because their students didn’t bring enough profit to the bank. How is that a “partner”?
March 25th, 2009 at 8:09 am
At my schools, we opted to participate in both programs due to the financing scare the occurred in FFELP the past year or so. So far, I have not activated the Direct Loan program because of the complexity of administering that program based on past experience. I will do whatever needs to be done in the future, but I see no advantage whatsoever to deliberately setting up another federal monopoly to run something as important as funding the higher education of our children.
We need to remember what happened with Fannie Mae and Freddie Mac.
Didn’t our experience with the housing mortgage market via Fannie and Freddie teach us anything? That quasi-governmental business model has proven to be a dog that won’t hunt. Why would we then extend it to the entire student loan business?
This is especially true now that Congress has, finally, wrung out the excesses that existed in FFELP up until 2007.
March 25th, 2009 at 9:18 am
Student loan delivery is the only area in which we get to choose the method by which those taxpayer funds are received. We don’t get to choose who sends us our social security checks, do we?. Why, at a premium cost of $94 BILLION, should we get to choose FFELP? The bottom line is I am in this business for students, and if the $94 BILLION can be transferred to students instead of ANYONE else, I’m all for it!
March 25th, 2009 at 3:04 pm
Everyone does have an opinion and whether right or wrong, bottom line we should be more concerned with a 40+ year program that has proven to work, along side a rather young program that is producing, however, the real issue becomes our freedom to choose. What happen to that? As schools we can choose which loan program meets our needs, FFELP or DL. There are opinions and differences with both programs, but to take away our right to choose goes against what America stands for. I would question the next step of the maze….will the government begin to choose which colleges get what type of aid and how much? Perhaps the next step to make college affordale will depend on your tuition costs and offering financial aid only to schools that meet performance and cost levels set by the Department. Hmmmmm….what will that do to the environment!
March 26th, 2009 at 11:46 am
Commenter #10: I would love to see some documentation on that - if the Department has outsourced overseas, then I think that’s an important fact that needs to see some sunlight.
March 27th, 2009 at 5:25 pm
FYI - NASFAA has checked with the Department and they indicated that the FDL call center is not manned overseas nor is the information shared with anyone overseas. This is true for both FDL and for FFELP loans the Department purchases.