Government Takeover on Campus

Stephen Spruiell: Students Should Know The Obama Administration Is Coming for Your Stafford Loans

(National Review Online)  Stephen Spruiell is a staff writer for National Review Online.

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The Obama administration is trying to strong-arm America's colleges and universities into complying with a bill that hasn't been signed into law yet. The bill, which would replace current subsidized-student-loan programs with a government-run system, passed the House last month, but its fate in the Senate is far from clear. Sen. Tom Harkin, chairman of the Education Committee, plans to use the budget-reconciliation process to pass the contentious bill with a simple majority, but The Hill newspaper reports that it might not even have 51 votes. The bill is far from a fait accompli, making the administration's pressure campaign all the more egregious.

Education Secretary Arne Duncan sent a letter Monday to colleges and universities urging them to make sure they are ready to switch to the government-run system for the 2010-11 academic year. But most of the nation's 5,000 colleges and universities prefer to work with private lenders. Under current law, the government offers subsidies to banks and non-profit lenders that make low-interest loans (called Stafford loans) to college students. Since 1993, the government has also made subsidized loans available through a direct-lending program - think of this as the "public option" for student loans.

The public option has proven unpopular: Except for a credit-crunch-related spike last year, its market share has fallen steadily since its inception. Schools prefer private lenders because they tend to offer higher service levels with the goal of making students lifelong customers. The government processes paperwork, and that's about it.

But the Obama administration wants to make the public option the only option, primarily because it's cheaper for the government to make low-interest loans directly than to subsidize private lenders that make them. For one thing, the government's administrative costs are lower, as you might expect from a program that offers little to no added value. More significant, moving the loans directly onto the government's books would allow Washington to hide the true cost of the subsidy. This is where the bulk of the administration's estimated "savings" comes from.

The Obama administration says the House bill would save taxpayers $87 billion over ten years. (Actually, the net savings would be zero. The administration plans to spend all the money on Pell grants and other forms of means-tested aid.) But Sen. Judd Gregg thought that number looked a little high. He asked the Congressional Budget Office to re-run the numbers after properly accounting for the risk of having all those loans on the government's books. The new estimate finds that the bill would actually add $40 billion to the national debt.

Not only would the switch be bad for students and for taxpayers, it would also create logistical headaches for universities. Many financial-aid professionals have complained that the administration's timeline is unrealistic. Colleges and universities start putting together financial-aid packages for the fall semester as early as January. "They're saying it's as simple as throwing a switch," Dewey Knight, associate director of financial aid for the University of Mississippi, tells NRO. "Well, I'm the guy throwing the switch, and I can tell you it's not that simple." Knight describes the administration's attitude as "an insult to people who spent years getting delivery systems in place. We didn't just throw a switch to get where we are."

Sen. Lamar Alexander, a former university president and education secretary, agrees. "I think we're about to have a 14 million-car pile-up on the highways of American education - right after the first of the year, when that many students receive acceptance to college, turn around, and find the whole system a mess."

Alexander explains, "Right now, we have 2,200 profit and non-profit lenders who provide students with information, counseling, and help filling out applications. And, suddenly, their role is going to be eliminated." The administration's plan would make getting a student loan about as much fun as dealing with the IRS or DMV. "Students will be asked to call a call-center at the Department of Education."

Knight says he sees Duncan's letter as part of an attempt by the administration to shift blame pre-emptively onto financial-aid administrators. "They'll say, ‘If you had gone with the flow, there wouldn't be these problems that have cropped up,'" even though the problems were inevitable.

Robert Shireman, the administration's point man on higher-ed policy, sounded vaguely threatening when he made this point at a conference of financial-aid professionals last summer: "The reality of the marketplace dictates that to be safe as a financial-aid officer . . . get ready to be a direct-loan school prior to Congress passing legislation."

Knight is one of the few university financial-aid administrators still willing to criticize the administration's proposal openly. "There has been a lot of pressure on aid administrators," he says. "They've tried to go above the administrators' heads to the university presidents."

NRO reached out to several university financial-aid administrators, but Knight was the only one who would speak for the record. A Republican staffer on the House Education and Labor Committee says that financial-aid professionals weren't always so quiet. "Early on in the process, we heard from a number of financial-aid administrators who opposed the switch, and some were willing to work with us openly on alternatives. Our sense is not that these concerns have gone away, but that there has been pressure from a number of different directions not to talk about those concerns." The staffer says she's heard about "specific instances at individual schools where members of Congress or administration officials have contacted school leadership in an effort to tamp down opposition."

The administration's strong-arm tactics extend to the Senate, where its allies plan to abuse the budget-reconciliation process to pass the bill. ("That's the only way it gets passed," says a Senate GOP staffer, who points to opposition from Democrats Ben Nelson and Arlen Specter.) And because the Senate can consider only one reconciliation bill each year, we might see a scenario in which the Democrats try to combine the health-care bill with the education bill and pass the whole thing with 51 votes.

On the Senate floor yesterday, Alexander asked Duncan to send out a follow-up letter - one that reminds schools that the administration's proposal has not yet been signed into law.

"People are getting tired of Washington takeovers," Alexander says, "and the administration has complained that it inherited the takeovers of the banks and the autos. But this is a purely voluntary Washington takeover, and it's a takeover that has to be approved by Congress." The administration should "take one step back," he says, "work with Congress to extend the law that backs up the traditional student-loan program, and then work with Congress to fix whatever needs to be fixed about the current system."

Note to the Department of Education: That means working with the opposition instead of trying to shut it down.

[jmnd]

My husband and I have worked with the government farm programs for about 7 years. Between all the paper work and the waiting for programming funding we would end up going to local lenders for assistance. This year we have decided that the benefits of the government programs have not been worth the frustration and moved all of our loans to our local bank. I'm glad we had the choice!

[jjreding-2009]

I had to go to a private lender for my college loans and now I owe at least $50,000 and (according to one of my loan bills) possibly $80,000 (I don't understand this one) and I have no way of paying this off. I'm on disability and get less than $12,000 a year in Social Security. I THOUGHT that by going back to school to earn my degree (I'm 51) I'd have a shot at a good career for the rest of my life - however ....

If there was an option like this that is proposed my loan costs would probably be HALF of what I owe now.

[intelligence_provider]

JJ, sorry to hear about the mounting debt burden and little means to buy it down. I can assure you though that the Direct Lending program would yield the same results with respect to interest rates but at a higher risk of default - statistically speaking. If these savings are pumped back into Pell grants, that would only cover roughly 40% of the FAFSA population. Therefore, most people would not see a change in their aid yet the average will be at higher risk for defaulting on their loans. Not a good trade-off in my opinion.

[FAAdministrator]

Having supported the FFELP (private sector) loan program for the past 25 years, I switched to Direct Lending this year after our guarantor merged with another. My decision to switch was based on the fact that students are often bewildered when they go into repayment. This happens for many reasons, but many students choose different lenders throughout their post secondary education. Having different lenders, sometimes different guarantors and loan servicers only exacerbates their confusion. ?Who do I pay, how do I combine or consolidate my loans.? Eventually having all colleges on DL would certainly help future students know where their loans are and who they need to pay. Moving all colleges to Direct Lending in one year may however, overload the DL System and some college staffs. The Department of Education staff I?ve worked with have been very professional, helpful, and patient. My experience with the conversion has been only positive. Having thousands of colleges switch to direct lending at once probably isn?t a good plan.

[amorrone2012]

Let's be very clear here. There is no government "takeover" because the Stafford Loan Program is already a government program. With FFELP (the loan program to be discontinued) the government pays lenders to make these loans, and even provides funding for the loans when the lenders cannot! As a financial aid administrator who has worked with both FFELP and Direct Loan, I can see no reason for the existence of the former except to line the pockets of corportate lenders. This is not a matter of choice, this is the government deciding how best to run its own programs. Let's eliminate the middlemen now while we can! Let's return profits from these loans to students through increased grants, instead of funding CEOs bonuses and trips to spas for lending employees!

[intelligence_provider]

I disagree. The Stafford loan is a federal loan product - yes. Much like FHA/most mortgages. The federal government does not fund FFELP loans (until the recent PUT option/buy back program). They subsidize the interest and defaults. That is true in the Direct program as well so that cost is a wash although tax payers front all the money up front - by the way, the government is in the red so they really don't have the money. The difference is where/how the proceeds generated are distributed - reinvest in jobs/interest rate deductions for students/etc. Let's keep in mind that the 2 big government programs for funding mortgages went upside down. Govenment serves its purpose but it's a failure when it comes to business affairs. The financing of loans is going to be a debacle if it's 100% direct. Look at the recent VA benefits. They just go ahead and float checks after being backlogged for 8 weeks. Can you imagine if all the sudden the government system fails...where do we go? Keep in mind Fannie Mae and Freddie Mac had Wells Fargo/Suntrust/etc. for homeowners to go to. Direct fails...there's no place to go but back to Private Alternative loans...like before the Higher Education Opportunity Act. Let's not go there!

[noloyalisti]

The private sector has failed at almost everything. They cannot be trusted to be cost effective and efficient. The level of waste in big corporations including huge CEO salaries is breathtaking.

I fail to see the American love affair with greedy, uncaring big corporations

[cbs_tom]

And you really think that the government is the way to go?

[jdubow]

Most private loans are much more expensive (shorter repayment times at higher interest rates) for the students than government loans. They are also less forgiving of repayment problems students new to the work force may face. I can't think of one 'service' given by private loan corporations to students. What they provide to colleges I don't know about. The article needed to be more specific and quantitative about why private loans benefit students. It also would have been a good idea to interview students and parents, the largest stakeholders in this debate. Bad job CBS

[rmsmkm]

Jdubow, this article is refering to the student loans in the FFEL program and not the Private Alternative loans that you are refering to. There is a HUGE difference and the author of this article is spot on with his observations.