Supply-Side Education Policy

As part of a Slate series of policy briefs for the next president, UVA law professor Jim Ryan offers a fix-NCLB agenda. But he fails to notice that his proposed solutions completely contradict one another.

We are told, for example, that because NCLB "requires schools to test the bejeezus out of elementary- and middle-school students in reading and math," we should "Administer fewer tests. National tests should be given less often, perhaps in only fourth, eighth, and 11th grades."

We are also told that "Current test results don't tell us all we need to know about schools" because they ignore subject like "social studies, history, literature, geography, art, and music," and that "What we can't tell from scores alone, because they don't tell us where students started or how much they progressed over the year, is the value that a particular teacher or school has added to a student's education." Therefore, "School quality should also be measured using value-added assessments, crediting schools that make exceptional progress with their students, regardless of where those students started."

Which is it? If the NCLB is to be faulted because it causes schools to "downplay if not ignore subjects not tested," how does fewer tests in the same subjects fix that problem? And you can't have value-added measures without annual testing, which Ryan wants to eliminate.

This is, to use a bloggy cliche, a classic "and a pony" policy agenda. NCLB can be improved, no doubt, but the people who wrote it weren't morons; there are some very real and difficult tradeoffs to contend with in formulating accountability policy, and one of them is the tension between the costs and burdens of assessment and the need for comprehensive information. This is the equivalent of promises to cut taxes and increase services. Call it supply-side education policy: the less we test, the more we'll know.

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Graduation Day

As the Times reported this morning, Secretary Spellings announced a new policy today that all states must calculate high school graduation rates in the same way under NCLB. It's a good idea, and illustrates several important things about national standards and state / federal relations.

First, if you give states broad discretion to define how their educational success is measured, it's a sure bet that at least a few of them will, with a straight face, put forth definitions and standards that are so lax and self-serving that they'd be funny if they weren't so sad. For example, when you read the words "on-time high school graduation rate" you probably think it means "percent of students who start high school who graduate on time." You'd think this because you're not insane, or running a state Department of Education. But for years North Carolina has interpreted this phrase to mean "percent of students who graduate from high school who graduate on time."

To repeat: Instead of calculating graduation rates as (on-time graduates / entering freshmen), North Carolina has, until this year, calculated graduation rates as (on-time graduates / all graduates). So a high school could see two-thirds of its students drop out in the 10th grade to go work at Chick-Fil-A, but still post a 100% graduation rate as long as the remaining third graduated on time. Other states have adopted fun policies like reporting the percentage of 12th graders who graduate, etc., etc.

The second thing to consider is that this new policy is a kind of national standard. There are lots of people around town who will tell you that national educational standards are a total non-starter politically and will never happen. But that's not really true; the palatability of national standards depends, as it ought to, on what is being standardized. There's no logical reason for different states or localities to adopt different defintions of "high school graduation rate," a term that has only one logical meaning. That's why today's announcement probably won't create a massive hue and cry about federal power grabs and the homogenization of the public schools. Graduation rate means what it means.

The same logic can, and should, be applied to academic subjects. Should middle schools in Richmond, VA be teaching American history from 1860 to 1870 in the same way as their counterparts in Juneau, Alaska? Probably not. But for other subjects, particularly basic computational and language skills in the early grades, there's no earthly reason for 50 different sets of standards and assessments. I can't imagine there's ever been a parent who, upon discovering that their 2nd grader couldn''t add 2 and 3, said "no problem--we'll just move somewhere with different standards."

Empty Threats

I was having lunch with a friend last week, super-smart guy but not an education person, when he mentioned that Arizona was about to opt out of the No Child Left Behind Act. He was surprised when I said it was the first I'd heard of it, because here I'm supposed to be the person who gets paid to keep track of this stuff. So I went ahead and looked for it and sure enough: "The Arizona House of Representatives is on the verge of opting out of the controversial No Child Left Behind Act, President Bush's premier educational accomplishment."

Huh! Of course they'll have to get it passed the State Senate and the governor, but still...whoops, wait a minute...few grafs later..."Some of the support stems from a change [the author] added to the bill Wednesday. If the state would not reimburse local school districts for the amount of lost federal dollars, Arizona would stick with No Child Left Behind." Ah.

That amount being $600 million per year. In the state with the worst budget deficit in the nation.

So my policy of ignoring all state threats to boycott NCLB on the grounds that they never come to anything turned out to be solid after all; this is no different than the Arizona House passing a resolution expressing the sense of the membership that the Cardinals should stop losing so many football games.

It seems fair to say that over the past five years, the leaders of the 50 states have collectively weighed the consequences of (A) cutting school spending by 5% to 10%, (B) raising taxes or cutting spending on other things in order to raise an amount equal to 5% to 10% of school spending, or (C) implementing NCLB, and they've all decided that (C) is the best option. You may disagree, but that's what they believe.

Paying for Public School

It may seem strange to pay to attend a public school, but this article in Sunday's Washington Post reports on parents who do just that. In most public school choice arrangements additional costs are absorbed by the school district or state, but in some cases parents are willing to pay 'tuition' for their child to attend the public school of their choice. And apparently D.C. parents, who only have one, urban district to choose from, can opt to cross state borders to send their child to school in Maryland or Virginia. This option isn't cheap, though--Maryland's Bethesda-Chevy Chase High School costs $13,627 a year, a price most D.C. parents can't afford.

Exchange Rates and Amsterdam Falafel

I was sitting my hotel room in Berlin last week, watching BBC World, when the news turned to the American economy. The gist of it was: because the dollar's so weak, we're screwed. I'm not an economist, but I've never quite understood why I'm supposed to be so upset about this. As a tourist I'm screwed, certainly--I was Rome about five years ago, back when you could by a Euro for 85 cents, and it was pretty great. Now they cost $1.55, which means I paid more for my sweet new pair of blue sueded Adidas Spezials than I 'd like to admit. But it's not like the weak dollar has had the same effect on prices here, where I live and spend most of my money. There are ways of measuring such things, after all. 

But no, the BBC announcer assured me that things were going to hell in handbasket in America even as I sat there. As evidence of this, they cut to a reporter standing outside an American store. Things have gotten so bad, he intoned, that some U.S. stores, like this one, are now accepting Euros as payment! Cue ominous music! He walked inside, camera tight on his shoulder, and went up to the counter with his twenty-Euro note to buy...falafel. At Amsterdam Falafel, in Adam's Morgan, here in DC, where I've eaten probably 15 or 20 times. Small world. 

So last night my wife and I are deciding where to have dinner before going to a play (Stunning, at the Woolly Mammoth Theater, it derails a little in the last act but is otherwise quite good), and I've got a ten-Euro note left over in my wallet, so we decide to give this whole mixed currency thing a try. And sure enough, they guy behind the counter happily accepted it and gave me the going exchange rate, which ended paying for almost the whole meal. 

But I still don't understand what this is supposed to mean or why it's a signal or function of the weak dollar. At any given moment, the exchange rate is what it is. From my perspective, the only advantage of buying falafel with Euros is that I got a better deal, in terms of the exchange rate and lack of commission, than if I'd taken my Euros to the Travelex on K Street. But that doesn't have anything to do with the value of the dollar relative to the Euro, it would have been just as true back when the dollar was strong. If the owners of Amsterdam Falafel want to accumulate Euros as a means of betting that the dollar will become even weaker, there are surely easier ways to do it. There can't be that many people walking around DC with Euros in their pocket making spending decisions based on who'll take their foreign currency. It was obviously a fantastic publicity coup, but other than that, I'm puzzled. 

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Remind Me Not To Raise My Kids in Tampa Bay

Via Sherman Dorn, a Florida state senate committee has approved a bill that would give high school biology teachers the "academic freedom" to teach whatever non-scientific theories they please--Zoroastrian creation myths, anything--adding to existing Florida statute instructing history teachers that "American history shall be viewed as factual, not as constructed, shall be viewed as knowable, teachable, and testable, and shall be defined as the creation of a new nation based largely on the universal principles stated in the Declaration of Independence." In other words, in Florida, science is whatever people believe it is (or isn't), while history is beyond interpretation and debate.

Berlin Diary, March 2008

There's a quote from the artist Anselm Kiefer on a gallery wall inside the Hamburger Banhoff Museum in Berlin, where I vacationed last week. It begins, "The future is rubble." Kiefer goes on to quote verse from Isaiah about grass growing on housetops while pondering the inevitability of destruction and possibility of renewal. That a German painter and sculptor born in early 1945 should think way, and create darkly moving art to match, is unsurprising, given that the history of nearly every museum, cathedral, and building to speak of in Germany's capital city contains some variation on the phrase, "Until it was bombed into rubble during World War II."

All places have their scars--the operative phrase in Ireland is "until it was razed by Oliver Cromwell in 1649"--but Berlin's are fresher and deeper than most, a consequence of destruction followed by partition. I'd seen pictures of the Wall, of course, heard Kennedy and Reagan's famous speeches and watched the '89 celebration. But I never really understood how wrong it was until I stood where it used to be. Great cities have structures, centers, axes, spines. A prime meridian in Berlin runs north on the Ebertstrasse from the renewed Potsdamer Platz, past the site of the new Holocaust Memorial on the right and the vast greenery of the Tiergarten on the left, between the east-facing Brandenburg Gate opening up to the wide Under Den Linden boulevard lined with hotels, universities, and museums, then a few steps farther to the historic, west-facing Reichstag.

The idea that less than 20 years ago this same path was a 100-yard wide no-man's land of machine guns, barbed wire, and block towers staffed by soldiers ordered to shoot on sight is hard to fathom. Imagine the same thing running through the middle of Times Square, jogging north to Columbus Circle and then east along 59th street to the river, and you'll get a sense of what I mean.

This still-ongoing return to normalcy makes Berlin a really interesting place to visit. There are lots of other reasons too: the museum systesm is terrific, probably the best and most extensive I've seen outside of Paris. The former eastern section has the restaurants, shops, streetlife, and energy you get when money and people start flowing back into an urban space they once left. Street vendors sell postcards of complete with (alleged) chunks of the Wall, which is apparently becoming a kind of Cold War True Cross. And it's always interesting to notice examples of Things That Are Better in Europe:

- You can bring your dog on the extensive, efficient metro system, where trains arrive every few minutes. You can also eat and drink beer, which is sold in kiosks located right on the platforms. This seems to work perfectly well, with no mess or bad behavior, even when the cars fill up with inebriated, singing football fans heading to a weekend afternoon match at Olympic Stadium.

- The coinage.

- The erudition of museum audioguides.

- The big department stores (KaDeWe, located in the downtown of former West Berlin, out-Harrods' Harrods).

Things That Are Better in America: Not having to root around in your pocket for 30 cents to give to a dour, unhelpful middle-aged lady every time you want to use a public restroom. Also, people smoke everywhere in Berlin--the Marlboro Man, banished from his home country, is alive and well on billboards. There's also a surprising amount of graffiti, not the fun kind, even in the nice places.

It was interesting to learn about Germanic history, of which I confess I knew little pre-World War I. All the Fredericks and electors and coalitions of kingdoms and states are confusing. Did you know there was a failed revolution in Berlin in 1848? I didn't, or I had forgotten. Another effect of the 20th century's monumental destruction, I suppose--it's hard to see past it to what came before.


The whole city evokes a sense of trying to come to grips with history while also transcending it. Kiefer says he was told virtually nothing of the crimes of Nazism while growing up after the war, and his art is an obvious repudiation of that kind of willful amnesia. The conspicuous new memorials and planned museums of Nazi and Cold War atrocities reflect a similar mindset.

And the simple fact that Berlin has reverted back to a peaceful, open society is having a powerful effect. Our hotel was located about a half-mile from Potsdamer Platz, an intersection of boulevards that was, at the beginning of the 20th century, one of Europe's busiest centers of transit, society, culture, and commerce. Then came the two world wars, and the fires and bombs that tore the graceful hotels, clubs, and buildings to the ground. Then the Wall cut it in two, and the space lay empty and fallow.

Now it's coming back to what it was. Something like $25 billion has been invested in Potzdamer Platz over the past two decades, resulting in huge glass-roofed courtyards, shopping malls, a new train station, offices, film festivals and theaters. When wars and ideologies don't get in the way, people do what people do -- walk, shop, eat, drink, talk and converse, come together in a common space. To a Berliner trasported forward from a hundred years ago, Potsdamer Platz would probably seem, in many ways, familiar. But he would probably wonder what on earth could have happened to wipe away the old structures so thoroughly, and why people kept stopping to look at that small, ugly piece of concrete wall.

Lawless Policymaking

So I went on vacation for a week and missed the whole differentiated consequences pilot project thing. Alas. But it's interesting to see it from a little distance. A few thoughts:

For readers not steeped in NCLB arcana--and really, what's the matter with you--Secretary of Education Margaret Spellings announced that she would allow 10 states to change what they do with schools that fail to make "adequately yearly progress" under NCLB. As written in the law, AYP is binary standard--you make it or you don't, and the law doesn't distinguish between schools that miss the cut with one group of students by an inch and those that miss with all their students by a mile. NCLB critics say this is simplistic and unfair, and they have a point. A somewhat overblown point, since states have adopted a range of statistical gimmicks to prevent schools from missing AYP by any amount, and because you have to miss AYP for multiple consecutive years for consequences to really kick in. But a point nonetheless.

The pilot project will allows states to react with (presumably) more resources, support, and pressure in the really bad schools than in those on the margins. It will only be open to states that have done a reasonably good job of implementing the law--e.g. no track record of making AYP determinations six months after the school year begins--and that have identified a substantial percentage of schools as needing improvement. These are all good ideas--there's no reason to have differentiated consequences in a state like, say, Wisconsin, where only 4 percent of schools miss AYP. There's nothing to differentiate when all your schools are above average.

This is not, in the strictest sense of the word, legal. The black-letter law is pretty clear: If you want federal money, you have to implement an accountability system that works as follows. There are no sections or subparagraphs that say The Secretary of Education may at her discretion alter or ignore the previous subparagraphs if people seem to agree they're not written well and Congress doesn't get around to reauthorizing the law on schedule. But this is nothing new; Sec. Spelling did the same thing with a "growth model" pilot project a few years ago, which allowed states to rate schools based on year-to-year improvement, rather than absolute levels of performance.

Sec. Spellings can do this for a simple reason: nobody objects. She's using what amounts to an extra-legal, consensus-driven process of amending the law without going through the whole hassle of introducing bills, havings votes, getting lobbied, etc. etc. The check on this method is that anyone with standing can derail it simply by saying so: If Senator Kennedy, Representative Miller, Representative Boehner, or any of the major interest groups hated the idea, it wouldn't be happening. But since the only real objections have been "it doesn't go far enough," the process goes ahead. It's actually a pretty efficient when you think about it.

It's also interesting to think about the long-term implications for NCLB reauthorization. My best guess is that nothing moves until 2010 at the earliest. That would still be a faster turaround than the Higher Education Act, which nearing the 10th anniversary of its last incarnation. What happens if, in the meantime, this Secretary of Education or the next one continues to pick off the law's major flaws, one by one? A couple of predictions:

First, it will be become increasingly clear that NCLB is not identifying schools as low-performing because it's horrendously inaccurate and arbitrary but because those schools are, in fact, low-performing. This is what happened with the growth model pilot project, where it turned out that most of the schools that look bad when judged by an absolute standard also look bad by a growth standard. Students just aren't learning there. Similarly, despite what you may have read in the newspaper, NCLB has not resulted in states coming down on large numbers of schools like a ton of bricks. It is simply not happening. In fact, if states takes the terms of the pilot project seriously, a reasonably likely outcome is that more schools will be subject to legitimately serious consequences, not less.

This, in turn, should provide some clarity to the accountability debate. In the end, the NEA didn't decide to wage war against NCLB because the law is underfunded, or lacks a growth model, or lacks differentiated consequences, or relies on standardized tests of inadequate quality, even though all those things are true. The NEA rejects the idea of assessment-driven governmental accountability for public education at its core. As long as this remains the case, no fixes--regardless of how sensible they may be--will change its mind.

Update: Marc Dean Millot points out that the Secretary could cite certain waiver provisions in NCLB to justify the legality of the pilot project. Fair enough, but it's a pretty broad interpretation; waivers typically involve states coming to ED with ideas, notices in the Federal Register, etc. That's not what's going on here. The larger point still stands, which is that this is essentially a de facto NCLB reauthorization happening in increments via consensus-backed adminstrative fiat. Which is why Millot's assertion that the waiver provisions "could just as easily be used by a future (Democratic) Secretary to kill [Supplemental Educational Services] outright," is silly, there is by no means a consensus that SES needs to be killed, far from it.

Everyone Wants Choice

School choice proponents usually focus on the potential for school choice to provide more, and better, options to low-income students--those students for whom school choice is generally not an option. But when choice policies are put in play, whether its virtual schools, charters, or inter-district choice, middle-income parents are often also interested in the newly available options. And the reasons vary--convenience, finding the right fit, and simple school quality all play a role in who uses choice and how they choose. A few stories this week illustrate how suburban parents are using school choice:

Today's Las Vegas Sun reports on the first graduate of the county's virtual high school. Matt Sosa started off attending the virtual high school for medical reasons, but finished there because he felt it was the best fit for his learning needs--and he received his high school diploma without spending a single day in the classroom.

The Los Angeles Times reported yesterday on a rift in Palos Verdes school district--a high-scoring, well-off district in which some parents are pushing to start a charter school to get away from what they see as a school system that is overly focused on test scores. But the parents that would be left, like many who criticize school choice, argue that the financial drain from the charter school will only hurt the remaining students.

And finally out of Rhode Island, an editorial in the Providence Journal arguing that parents should be able to send their children to school across district boundaries, both to allow parents to find the best school without having to buy a house in the right zip code and also to provide a way for parents to express their dissatisfaction with schools--by leaving.

There's nothing wrong with offering additional choice to middle- or high-income families, but policy needs to be designed, using transportation, targeted lottery systems, and equitable funding, to ensure that low-income students are the primary beneficiaries of school choice policies. And if policy is not sufficiently targeted, middle-class parents, as the above stories illustrate, will take advantage of the new options, potentially squeezing out the students who need those options the most.

The Tangled Web of Financial Aid Policy

Inside Higher Ed has a great piece today on the trade-offs inherent in institutional financial aid, focusing on the impact of institutions that move to a 'no loans' policy without also having a 'need blind' admissions policy. Doing both requires a hefty endowment and for those colleges that jump on the no-loans bandwagon without going 'need blind' there could be some unintended consequences that hurt the ability of low-income students to get into and pay for selective, private colleges. From the article:

The danger of going no-loans without being need-blind, Hill [President of Vassar College] said, is that it could result in some students receiving less aid and some low-income students not being admitted — at least once you leave the relatively small group of colleges and universities with stratospheric endowments. “If you are a school that is not need blind, and you go to a no-loan policy, you are going to make the financial aid for each of those you accept more generous, but it’s not saying what your overall commitment is,” she said. “If your aid budget is unchanged, or doesn’t increase in the future, you will be giving more financial aid to fewer students, and I’m not sure I would consider that a welfare-improving situation.”

Institutional financial aid doesn't always help those that need it most. Our first-ever Charts You Can Trust showed institutional aid increasing fastest for students in the highest income group. And we've followed up with charts looking at the impact of merit-based aid, or 'tuition discounts', that often go to the highest income students with the best test scores, and most recently at the continued income gap in college access to the most selective institutions--even among top students.

This article also raises an excellent question--one that's too often looked over in the debate about student debt--what is an appropriate amount of debt for college? Considering that a substantial amount of the financial benefits of a college degree accrue to the individual student, it is reasonable to expect students to invest in their own education. But that investment needs to be balanced against career expectations and the actual value of the degree. Another great quote from the article:

For example, Lindeman [financial aid director at Macalester College] noted that many colleges going no-loans say that they are thinking about the undergraduate who wants to be a teacher or join the Peace Corps, but who is worried about loan repayment. If that’s the problem, he said, colleges should be creating funds that repay the loans of new alumni who enter those or similar service-oriented (and low-income) fields. But he noted that the elite colleges that are boasting of going no-loans turn out plenty of lawyers and technology entrepreneurs and investment bankers — arguably far more than inner-city school teachers. Does everyone deserve a loan-free education, he asked?

Some great, if thorny, issues to think about in this piece, underlining that financial aid policy is far from being a clear-cut issue. Even so, if the discussion continues at this high of a level, then we're likely to see some good progress on the issue.

A Good Deal.

Via the PEN NewsBlast, the Chicago Tribune reports on efforts in Chicago to introduce a residential school in the district. Having recently toured the SEED school in D.C., I’m encouraged to hear that the idea of a residential public school is spreading. Though, as the article points out, the price tag is a big deterrent—the SEED school’s planned Maryland school will apparently have a price tag of $34,000 per student.

But considering that the annual cost of incarcerating a juvenile offender in Illinois tops $70,000—not to mention the economic benefits of having well-educated, productive citizens—that starts to seem like a pretty good deal.

Long Before NCLB...

With so much attention paid to the future of NCLB--when will it be reauthorized and what will it look like--today's event was a great opportunity to look back at what got us to this point. Chris Cross, Sam Halperin, Kati Haycock, and Jack Jennings led us through the history of the law and what it means for today's debates. It's important stuff. If you missed it, listen here.

Smoldering

In the announcement heard 'round the edu-blogosphere today (but on the back page of the Washington Post), Secretary Spellings invited states to apply to be one of 10 which will be granted more flexibility under NCLB. The selected states will be allowed to differentiate consequences for schools that are failing to reach NCLB goals on multiple measures and those that aren't hitting them on just a few. Or, in Secretary Spellings' words, states will be able to distinguish between "on-fire schools and those with a smolder."

Hopefully this change will bring about some good innovation and thinking in the pilot states, and help guide national policy on how to address the needs of the schools in the most trouble, without forgetting that those schools in which one or two groups of students aren't reaching proficiency still need assistance and accountability for improvement.

This article in Monday's Washington Post highlights the continued need for attention on within-school achievement gaps. The article cites the credit many, particularly disabilities rights advocates, give to the law for finally bringing attention to the needs--and perhaps most importantly, the learning potential--of students with disabilities.

Secretary Spellings' added NCLB flexibility should allow a more reasonable, targeted approach to school reform, which is certainly a positive development. But this change should not allow some 'smoldering' schools to get by without any attention to implementing the reforms needed to also put out the smaller fires.

March Madness Round Two

Yesterday, we declared Stanford the winner of the ES graduation rate tournament. Today, we look at who comes out on top looking at the difference between the institution's overall graduation rate and their basketball team's grad rate--the one with the smallest difference wins.


--Thanks again to Abdul Kargbo, Sumner Handy and Kevin Carey.

Potholes

Last month, we published a Chart You Can Trust showing that, when it comes to getting into college, it's still better to be a mediocre student with a high-income family, than it is to be a high scoring, low-income student.

The Consortium on Chicago School Research just released a report looking at why this might be the case. This second report in a series on what determines students' success in getting to college looked at the college search and application process and where students "encounter potholes on the road to college". The results speak to the importance of having a strong college-going culture in schools and having adults that can help students navigate the complex application and financial aid process--results that are relevant far beyond Chicago schools.

The chart below shows the pathway to (or away from) college for the sample of students CCSR followed. Definitely some potholes along the way. To find out more and read through all of the results, click here.

Haters vs. Critics

One of the more difficult things about adopting a left-leaning but essentially reformist stance on K-12 education is that you end up arguing with teachers unions a lot, not because you're anti-union, but because teachers unions are the most influential and vocal representatives of the existing education establishment that you're trying to reform. There's a world of difference between criticizing the policy positions that teachers unions adopt and hating the idea of unions generally. I think The Quick and the Ed can be fairly described as having a healthy amount of the former and absolutely none of the latter.

Even so, I'm regularly challenged to pre- or re-establish my pro-labor credentials as the price of questioning the wisdom of some standard union position or NEA talking point. It's tedious, particularly for someone who spent his whole career before coming to Ed Sector working for Democratic politicians and non-profits that advocate for low-income children. But then people like these idiots come along with their "Ten Worst Union Protected Teachers" contests and other sundry insulting tactics, ensuring that my tedium will continue into the foreseeable future.

Reasonable people understand the distinction (although with too many caveats, c'mon); people who are pretty much just as unhinged as their critics don't. As AFTie John notes, the vlog in question hilariously blames teachers unions for promoting standardized tests and accountability, which is kind of like complaining about the AARP's nefarious plan to privatize Social Security.

The Big Dance with an ES Twist

Following on last year's successful NCAA graduation rates bracket (well, not successful if you used it in your office pool), we've taken a look at how this year's teams would fare at the big dance if winners were based on the team's graduation rate. As usual, expect plenty of upsets (click on the image to see the full bracket).


For another measure of school success, check out Inside Higher Ed's NCAA bracket here. And stay tuned for a bonus round tomorrow.

--Posted with substantial help from Abdul Kargbo, Sumner Handy, & Kevin Carey

Life After Sallie

There have been numerous news reports of the “tightening” credit markets and their potential impact on student loan availability. The majority of federal student loans are made through private banks and if these banks can’t find investors to buy their loans, they don’t have money to make new loans—hence, a problem with student loan availability (to be clear, there is currently no problem with federal student loan availability). This problem isn’t actually new to student lending and the federal government solved it almost forty years ago.

When the federal student loan program first began in 1965, it faced the same “tight” credit market—not because of turmoil in global credit markets, but because banks were having a hard time finding investors who wanted to buy risky student loans. To solve this problem, the federal government created Sallie Mae.

For over 30 years, Sallie Mae provided a needed secondary market for student lending. But then things changed. Growing profits from student loans and a greater willingness among investors to buy student loan debt, combined with pressure from Republican lawmakers, resulted in Sallie Mae separating from the federal government. Sallie Mae fully ended its secondary market operations—and its relationship with the federal government—in 2004. Sallie Mae then proceeded to expand and become the biggest seller of student loan securities—the precise market that is seeing such trouble right now.

Privatizing Sallie Mae left the federal student loan program without any direct access to treasury funds and completely reliant on private credit markets. In the 1998 reauthorization of the Higher Education Act, Congress established the ‘lender of last resort’ program to provide assurance that students would have access to loans, even if there were no banks to provide them. The program authorizes guarantee agencies, non-profit entities that help administer the federal loan program, to step in and make the necessary loans, and gives them access to treasury funds. (The legislation also specifically requires Sallie Mae to act as a lender of last resort, as part of its repayment for receiving governmental benefits for the first 30 years of its life.)

This program has never been used. And as Secretary Spelling’s comments at Friday’s hearing before the House Committee made clear, we’re not really sure how effectively the lender of last resort program will operate—the ability of guarantee agencies to administer the program, whether electronic processing of loans is possible, and whether the federal treasury can make the needed funds available. Fortunately, we also have the Federal Direct Loan program, which enables the federal government to loan directly to students and to access treasury funds as needed.

The privatization in federal student lending has certainly led to some improvements, making it easier for students to get loan funds, improved loan servicing, and lower costs for many students. But what the past year has made clear is that the federal student loan program, just as it did back in 1965, needs direct involvement from the federal government. A loan program that receives the benefits of the federal government (a guarantee on defaults, low interest rates to students) but without the necessary oversight from the Department of Education and without readily available treasury funds, is much too vulnerable to the risky and sometimes unscrupulous behavior in the private market.