In response to my recent blog about the conversion to an all DL program, Kevin Carey, a person I admire and respect deeply (and with whom I almost always agree) countered with a compilation of his, Ben Miller’s and Jason Delisle’s thoughts. Since Jason and Ben are former colleagues, I appreciate that they both chimed in since I know that together they have spent a great deal of time and energy thinking about student loan issues. This is precisely the kind of dialogue that the higher education policy world needs since people with deep knowledge of the topic and a similar appreciation for the benefits of higher education can have different opinions and thoughts about how to solve some of the great challenges we face. Through this sort of dialogue, we might be able to rise above political posturing and actually come to some good solutions.
The truth of the matter is that I agree with Kevin, Ben and Jason completely when it comes to listing the weaknesses of the FFEL program and the ways in which an inflated system of subsidies and guarantees made the program far more expensive than it should have been. I do not love the lenders, and they know it. Where we differ, I guess, is that I’d like to see how we can maintain competition, support borrower choice, and ensure the lowest interest rates possible to borrowers, while also changing the government subsidies to reduce the cost of the program to the taxpayer. I don’t think the Federal government should be in the business of setting policy that encourages students to go to college, which necessitates borrowing from the government, which in turn benefits the government financially. In fact, I think the government would be in violation of Sarbanes-Oxley conflict of interest rules on this, if those rules applied to them.
I’d like to point out that in his response, Ben seems to confuse private loans with FFEL loans. I absolutely agree that private loans – loans made outside of the FFEL system and without the government guarantee – are a very serious problem. Not only are the interest rates associated with some private loans obscene, but students can be enticed to borrow too much and can be confused about the differences in borrower benefits between a Stafford and a private loan. Moreover, we have seen some lenders encourage students to borrow instead of applying for Pell grants and other low-interest loans. As the parent of college students, I was the recipient of misleading advertisements from more than one lender, and I made my displeasure known to senior leaders within their organizations. They may have sent me the advertisements because I am a mom, but I read them with the scrutiny of an assistant secretary. But let’s not confuse private loans with FFEL loans. Private loans were not the subject of my blog, nor are they a direct part of the FFEL vs. DL debate.
But since Ben raised the issue, ironically I believe that bad behavior in the private loan market is yet another reason why we should maintain the FFEL program. You see, the Department of Education has no jurisdiction over lenders who issue private student loans. Only if those lenders also participate in the FFEL program can the Department use its “power of persuasion” to try to promote good behavior in the private lending side of the house. Once the FFEL program is eliminated, the Department will have no connection to private student lenders and will have no authority to regulate or even nudge good behavior. The agencies that do have jurisdiction over private lending practices see student loans as a “small potatoes” issue – they don’t have time to worry about programs or practices related to loans the size of the average student loan. So without the FFEL program, I can almost guarantee that predatory lending practices among private lenders will increase and the Department of Education will be able to do nothing about it.
Thanks, Ben, for providing such a nice justification for the very subsidies that so many consider to be egregious. You are correct that without a federal guarantee and federal subsidies, unsecured student loans would be at a very high rate – as they are in the private loan market – which means that many students would not be able to attend college. I think most readers understand the difference between a secure and unsecure loan – lots of us have mortgages - but Ben’s response seems to miss the point that the whole reason the government intervenes in student loans is to allow students to access unsecured loans at or below the secured loan rate. It is not to charge students a high rate so that the government can make money and expand some other program. The FFEL program gave students the support of the Federal government so that they, absent collateral, good credit, or even a job, could participate in the market and secure a low-interest loan.
I completely agree that under the current economic circumstances, we could eliminate most if not all of the subsidies and even reduce the guarantee, but that argues for adjusting the FFEL program, not eliminating it. Moving to an all DL system that charges borrowers 8 percent interest – which is higher than the rate of interest charged to the Big 3, the failing banks, and homeowners who thought they deserved a mansion – is outrageous. Using education programs as a revenue source – a tax – is just bad policy, especially for an administration that wants more people to go to college. Like you, I do want to save the taxpayer money, but not by raising revenue on the backs of student and parent borrowers. Displacing a lower-interest bank loan program with a higher-interest government monopoly is, in my mind, just wrong.
But let me reiterate my main concerns about moving to an all DL system, which you didn’t seem to address.
1. Parents and students will pay higher origination fees and interest rates in the DL program than they do in the FFEL program because the Congress sets the rates for the DL program in statute, whereas FFEL lenders can offer reduced fees and interest rates below the DL level in order to compete for business. That the government can charge higher interest rates and require borrowers to borrow only from them is kind of the stuff that antitrust suits are made of.
2. When the Federal government has a monopoly on any service, it tends neither to innovate nor serve customers at a level that would be acceptable in the private sector. For example, nearly all of the technological innovation in loan applications, processing, servicing and borrower education have come from the FFEL lenders, who developed and tested solutions that were later adopted by the DL program. But thinking beyond the loan program, consider the current condition of the U.S. Postal Service. Or if that isn’t a good example, maybe I should remind you that Sallie Mae was the “government” lender for most of its history. Or perhaps you might like to think about the bang up job that Fannie Mae and Freddie Mac have done as quasi-government lenders.
3. We are creating a program that will necessitate increased Federal borrowing at a time when we are already borrowing too much money. As Jason Delisle so capably explained, already the CBO has cut its savings estimate for the conversion to DL nearly in half as the cost of borrowing has increased, which further proves that we have no idea how much it will actually cost to borrow as time moves on. But even more troubling than our inability to predict the cost of future borrowing, is the larger question about how much longer China will continue to purchase our debt. Given the instability in Iran and North Korea, not to mention unpredictable natural disasters, there may be reasons for which we must borrow money in the future, which means that we should do everything we can to eliminate discretionary borrowing now.
A more productive conversation might be one that is focused on how to improve both the FFEL and the DL programs in a way that supports healthy competition, reduces the cost to the government AND students, and eliminates our need to borrow more money from China. I am not advocating that we end the DL program, or that we maintain the current subsidy and guarantee rates in the FFEL program. Instead, I am calling for out-of-the-box thinking that will allow students and parents to borrow at the lowest rates possible, especially since college graduates aren’t exactly finding those million dollar jobs they were promised….or even the minimum wage job they once had in high school.
6 Responses to Isn’t the Student Loan Program Supposed to Be About Students?
rbannist - March 11, 2010 at 11:26 pm
What our society and higher education do not need now is yet another program under Federal control. The two tier system makes good sense. The need for well-qualified college graduates is paramount and requires some built in flexibility in the loan system as economic conditions and other factors change so rapidly. A one size fits all program dependent on Congress to fund spells disaster over the long haul. Federal programs by their very nature become glutted, inefficient, and not cost effective. Private financial institutions have to work effectively in the most cost effective manner possible. They are constantly in search of new methods and technologies to improve their operations. If a private lending instituion needs a new computer network to deliver services the best way possible, they budget for it, procure it, and put it on line. In a Federal system, is anyone even asking the right questions to find the right solutions? If an improved network were the answer. The process alone that would develop specifications, get voted on for funding, and made operational would go through so many hoops and loops as various interest groups demand their input on the process. Congressmen seek to have operations centers be good for business in their districts, and of course who’s to say the necessary bill to develop the new system wouldn’t have some amendments that would not necessarily deal directly with the issue but add some other thing that Congress thinks higher education should do creating yet another unfunded liability for schools that accept federal funds. The quality of private solutions is also much more self-enforcing. Those who cannot perform in the market effectively will close up shop and be gone. The more possible lenders compete to provide the best level of service, the better the outcome for students and parents funding a person’s college education. There are so many questions about where the National economy is headed and to the extent our current leaders have mortgaged the future for instant gratification in the present, those costs will come due sooner than anyone wants to anticipate. We do not need another program which piles on to the national debt. We also need support to keep student loans from default. Many questions need to be considered to make this system function to maximum advantage, but any notion that reduces or eliminates the private sector’s roll in the process is a horrible mistake and one more step to more total state control of the economy specifically in this case financial institutions.This citizen encourages policy experts, government officials and legislators, and academic institutions to continue the support of privately managed student loan programs and that those programs should be the primary source of student financial aid. The same stake holders must also work with all due-diligence to demand cost-effective approaches that provide the greatest value to the loan seeker.
goxewu - March 12, 2010 at 9:34 am
On what planet do Ms. Auer Jones and her amen-corner (and, my guess is, frequently planted–see comment #2 on Ms. Auer Jones’s previous “Is Now the Right Time to Convert to All-Direct Program?”) commenters live? My guess is on The Stepford Planet, right next door to Hugh and June Cleaver, where the atmosphere is particularly rich in nitrous oxide.All this economic Darwinism painted in pretty pastel colors: The most important thing to preserve in trying to get healthcare to 40+ million people in a society where even normal doctor bills are beyond the ability of working families to pay, is one’s absolute choice of a doctor. (They have no bread? Let them have their choice of devil’s food chocolate or pineapple layer cakes, even though those are even more out of reach than bread.) And the most important thing to preserve in trying to make student loans available to poorer students who really need them is–you guessed it!–”borrower choice.”"Borrower choice” is based on an assumption about which Forrest Gump himself would have been skeptical: that “competition” among lenders will drive availability up and cost down. Right. Just like, oh, “competition” among credit card companies has, with no Government intervention necessary, driven out usurious interest rates, gouging late fees, hidden charges, and the rest. (And just like the “competition” among Goldman Sachs and their ilk cleaned up the mortgage market, made the whole system of real estate loans simpler and more transparent, and strengthened our entire economic system.) The trouble with the “invisibile hand” of the market in the lending industry is that it does have one visible part: a middle finger extended to anybody who would try to prevent it from screwing over people more than one economic rung below its bonus-bloated CEOs and upper-level managers.
rbannist - March 18, 2010 at 10:30 pm
I suppose Diane Auer Jones’ credibility could be strangely enhanced by the total lack of quality so much of the criticism against her reflects especially in their refusal to attempt to deal with her issues straight on and through insults and insinuations attempt to refute her presentations.I can assure you this blogger who has written in support of her positions is not a plant as critic “goxewu” would suggest. I have been aware of Ms. Jones contributions and life’s work for a long time seeing how her interest in policy matters has developed out of lots of time in the trenches as a highly respected educator, small business owner, scientist, and member of her community. She is neither a person who has been isolated behind the abstract world of academia nor climbing the corporate ladder or actively involved in the Republican Party. Surely, one might disagree with her assertions, but attempting to discredit her with a bunch of cheap shots only reflects on the total lack of substance and inability to counter Ms. Jones’ contentions with hold hard facts.One would hope this dialog could be on a higher level than showing one’s paranoia toward the free enterprise exhibited by expressions of fear and loathing toward corporate America which provides the goods and services that are the backbone of high standard of living. Ms. Jones’ article was about college loans not the health care debate the she quite effectively raised concerns about the dangers of the government’s attempt to seize responsibility for health care provision. Okay, fine we can take this to the broader question of a free enterprise approach versus a quasi-socialist or statist approach.Is choice something that threatening that options in health care and student loans is just too overwhelming, nanny government needs to step in and make that choice. Where there are many options and strong competition, free enterprise becomes a self-cleansing system where those who provide the highest quality service at the best cost survive. How much of the financial market and health care industry are messed up because of way too much government intrusion using the political system to pick favorites. Do some research on how government involvement with Freddie and Fanny helped unravel the mortgage industry. Likewise, rather than favoring approaches that open up the playing field and make it more competitive in health insurance and investment banking, the government picks its winners and losers based on political advantage not economic necessity. Surely, we would all benefit if there were more strong, profitable, successful health insurance companies where the government provides oversight not control. Government control leads to waste, inefficiency, and decision making based on political desire not well run operations. Government involvement comes with strings attached.Amazingly, in a rather brief swipe at Diane Auer Jones’ examination of student lending, her critic has presented so clearly how paranoid of freedom the free enterprise haters have become.Our freedom is the very essence of what has made the United States the strongest culture in the world. When a person has a predetermined prejudice that the corporate entities are “screwing over” those a rung below upper management, such a person has already chosen to surrender freedom, not compete, and settle for whatever. The beauty of free enterprise is that if one entity is not providing an acceptable product, one can chose another company that does. When the government is in charge, all that’s left is their crappy service (AMTRAK, post office)and while we can chose to vote Democrat or Republican the big inefficient government agencies continue to grow like a sickly epidemic.
goxewu - March 21, 2010 at 8:47 am
“I have been aware of Ms. Jones contributions and life’s work for a long time seeing how her interest in policy matters has developed out of lots of time in the trenches as a highly respected educator, small business owner, scientist, and member of her community. She is neither a person who has been isolated behind the abstract world of academia nor climbing the corporate ladder or actively involved in the Republican Party.”Give rbannist a big raise!
rbannist - March 24, 2010 at 6:32 am
No raise needed! I just provided a little fuller picture of Ms. Jones activity prior to becoming a major player in the Washington scene. While a few of her positions are controversial and surely might rankle some progressives or friends of big government solutions, the continued portrayal of her as a product of corporate interests or a deeply entrenched Republican operative are simply false. It’s frustrating to see the chorus of some of her opposition to constantly make the same old unfounded assertions, the kind that suggest — she’s obviously in the pocket of BIG corporations or something akin to Karl Rove’s evil sister as a Republican strategist — to suggest that because this is where she comes from obviously nothing she says can carry any credibility.It’s the same old dirty logic that cheapens debate in so many arenas where if one cannot refute a person’s positions or fears a person’s issues might seem too convincing, attack the speaker personally, create false attributions about whom the speaker or writer represents to the point where Ms. Jones in this instant and many others in a variety of circumstances gain name recognition from the smeers directed against them and not their work itself. It’s amazing how some crafty cut and paste, taking things out of context, is another technique of these same critics’ bag of tricks.All the while, these critics cannot engage in a geniune debate concerning the issues challenging Ms. Jones to prove her assertions or refute her reasoning. If this arena were a scored competition, Ms. Jones would prevail for her oppositions’ failure to provide anything but generic criticism and personal attacks.While I appreciate someone would want to give me a raise, as long as there are always a couple well-meaning folks who’d give me a penny for my thoughts, I can always get my two cents in. I am not employed in Washington, DC nor do I work for or contribute to corporate USA or the Republican Party. I am on disability retirement as a former educator, and a professional in the technology and for-profit education industries. I represent no one other than myself but invest much time in staying on top of educational, cultural, and traditional liberal arts issues. I appreciate Ms. Jones’ work for the clarity of her argumentation, the independence of her judgment and her commitment to and fascination with being a learner for life. I look forward to Diane Auer Jones contiuing to grow as a major voice on public policy and wish that some of her reasoning, civility, and wit would rub off the members of the Washington shooting gallery.
goxewu - March 24, 2010 at 7:52 am
OK, since it’s freelance work, a big bonus. As for Mr. Auer Jones’s “critics cannot engage in a geniune debate concerning the issues challenging Ms. Jones to prove her assertions or refute her reasoning,” try comments #4, 5, 6 and 7 (out of seven total) on her post “Is Now the Right Time to Convert to an All-Direct-Loan Program?” as well as Kevin Carey’s much better piece that prompted her post.By the way, does that disability benefit have anything to to with government?