Time to Take a Stand

President Obama's Access and Completion Incentive Fund, which will help large numbers of low-income students graduate from college, is part of a larger package of reforms including the elimination of the Federal Family Education Loan Program (FFEL)--that is, the program in which the federal government guarantees and subsidizes student loans made by banks and other for-profit companies. Under the plan, the federal government would lend the money directly, as it already does for many students. The savings would be used to help fund the completion initiative and transform the Pell Grant program from a "discretionary" program subject to the whims of the annual appropriations process into a "mandatory" program with permanent funding and the grants indexed to inflation. All in all, this would be a huge boon for college students in need. 

But early word is that the past 24 hours have generated an enormous amount of counter-pressure from the student loan industry. Given what a good deal they're getting, it's not hard to understand why. From today's New York Times:

The government already pays a subsidy to banks and others making what are called federally guaranteed student loans. It also covers nearly all the losses if a student defaults on such a loan. In the current economic crisis, it is buying the loans, thereby providing the banks with capital for new lending. That has caused critics to say they wonder whether a middleman is really needed in this business.

“What has happened is, we set up a system in which we ensure liquidity by allowing them to dump their paper on us,” said Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers. If lenders rely on the government for money to make more loans, he continued, “What is the purpose of the loan industry?”

In other words, we now have a system that works like this: The federal government hands for-profit lenders some money. The lenders put some of that money in their pocket and hand the rest to students in the form of loans. If the students don't pay it back, the federal government hands the for-profit lenders some more money to cover the loss. If the students do pay it back, the for-profit lenders put some more of that money in their pocket and hand the rest to the federal government. Rinse, repeat. It's nice work if you can get it. 

The loan industry argues that it provides better "service" than the federal direct lending program. I am skeptical, for I was a student borrower once. For the first five years, the loan was held by a bank. Then I switched over to the federal direct lending program. In both cases, the "service" consisted of: A) Providing me with a mailing address where I was supposed to send my monthly check, and B) Cashing the check. Keep in mind that this is the same industry that recently used its government-subsidized profits to lobby the government to make sure that students can't discharge their loans in bankruptcy. Of course, they kept that option open for themselves, so now we have students in desperate financial straights who can't get out debt to companies that have walked away from all their own debt.  

It will be interesting to see how higher education responds to this proposal. It's easy to lobby for more Pell grants when there are no complications or downsides. Now it means going up against an industry with which higher education has long had a cozy--perhaps too cozy--relationship. Many college financial aid officers are said to support the FFEL program. Keep in mind these are the same people who were recently caught up in a series of embarassing scandals in which the loan industry used some of its government-subsidized profits to wine and dine college loan officers or even give them stock and/or put them directly on the payroll. 

Moments like this don't come along very often. Finally putting the Pell grant program on secure footing while helping more students graduate would pay of for students and society alike. It's time for everyone involved to stand up and be counted. 

See more from the always-valuable Higher Ed Watch here, while Matt Yglesias hits the politics:

Rather than a debate between progressives who want the government to provide a public service and conservatives who want the service to exist just insofar as it can be supported by the private market, we have a debate where both sides agree that the service ought to exist but the right thinks it’s important that it be done in a less efficient more costly manner because doing it that way generates profits for people who in turn give them money in some kind of nutty sense is supposed to preserve the integrity of the private sector.