Politics and Student Loans

In today's Washington Post, Kevin Burns, the Executive Director of America’s Student Loan Providers, which represents dozens of student loan companies, takes issue with a May 5th Washington Post editorial supporting the Direct Loan program. It’s not surprising that the leader of an organization dedicated to supporting private student loan companies wouldn’t like an editorial promoting government involvement in the federal student loan program. But Burns doesn't argue for less government involvement--instead, he wants more involvement in the form of higher federal subsidies going to student loan companies.

Burns starts off by scolding The Post for publishing the editorial in the wake of “potentially serious problems facing families in obtaining student loans for the fall” and goes on to fuel the panic by citing that 75 lenders have pulled out of the federal loan program.

The Post editorial actually sought to reassure parents and students by stating, “The Education Department has taken steps to ensure that its direct lending program can fill the gap. The House of Representatives and the Senate have passed bills that would also allow the department to buy federally guaranteed loans from private lenders, a concept President Bush has endorsed.” But somehow The Post editorial, according to Burns, “failed to support efforts by Congress and the Bush administration to avert a crisis.” So The Post, by highlighting recent legislation intended to help students get access to loans, wasn’t supporting Congress or the White House? I’m confused.

Actually, I’m not at all confused. Burns was scolding The Post, not because it didn’t support Congress and the White House or because it was being irresponsible in light of problems in the student loan market, but because it said something other than “Congress should restore the high student loan subsidies lenders received before the College Cost Reduction and Access Act of 2007”—legislation which eliminated $20 billion in student loan company subsidies.

Burns continues in his letter to make the case for a return to higher subsidies. First, he claims that “President Bush’s fiscal 2009 budget confirms that guaranteed loans are more cost-effective.” The 2009 budget was published after the subsidy cuts, and these cuts are a primary reason the FFELP program became more cost-effective than the Direct Loan program (although these estimates are much debated). Burns then argues that because the FFELP program is more cost-effective, Congress should revisit "last fall's budget cuts", i.e. reverse the subsidy cuts that made the FFELP program more cost-effective in the first place.

This is precisely the type of head-spinning rhetoric that has led to a confusing, complicated, and often corrupted student loan program. This isn’t to say that the FFELP program should be eliminated—it has provided the choice, innovation and service, that Burns talks about in his letter. But the subsidy rates that encourage lenders to participate in the program need to be removed from the political process.

Recently, Fed chairman Ben Bernanke (via New America Foundation) stated that, “a more market-sensitive approach--flexible enough to provide a wider spread during times of market stress and a narrower one during normal times--could provide a more robust structure” than the fixed subsidy rate that is currently set by Congress. Proposals for using student loan auctions to determine subsidy rates are still new (although all parent (PLUS) loans will be issued using auctions starting in 2009), but they hold some promise for moving the process for setting loan subsidies away from politics.

Finally, Burns states that “the case for a strong private-sector program is as compelling today as it was when President Lyndon Johnson created the program.” But while we’re talking about the past, I think it’s useful to revisit the 1979 comments of Alfred B. Fitt, the general counsel to the then newly-established Congressional Budget Office:

Viewed originally as an ingenious and inexpensive way to attract private sector capital to the student loan business, the GSL program [the former name of the FFELP program] has gone through piecemeal alterations that have transformed it into a system much more costly than a direct federal loan program, with the higher costs not redounding to the benefit of student borrowers, but rather to the benefit of the financial institutions that make the loans.

Thirty years later we’re still tinkering with the program, trying to fix this.