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Rep. Tom Petri says The New York Times hit the nail on the head Thursday, May 8, in a lead editorial heralding the more taxpayer-friendly of the two federal student loan programs.
"Ever since I helped create the Direct Loan program in 1993, I have defended it against the private interests who benefit excessively from guaranteed profits at taxpayers' expense through the older Federal Family Education Loan (FFEL) program," said Petri. "Lenders operating through FFEL have been raising the alarm about problems some are having with current financial markets. I have been encouraging schools that are concerned about the availability of student loans in the FFEL program to consider switching to the Direct Loan program which is immune to the effects of the credit markets, and provides the same federal student loans while also being more cost-effective."
Petri praised the Times editorial for recognizing the value of the Direct Loan program, and also for advocating making private lenders bid for the right to offer subsidized loans.
"The FFEL program relies on arbitrary, politically set formulas that fail to capture the actual cost of lending," Petri said. "Over the years, this has led to a tremendous over-subsidization of private lenders. Currently, many lenders claim to be leaving the program because subsidy cuts approved last year by Congress have made their businesses less profitable. With a bidding process, we can use market forces to determine just how much subsidy - and how little - is really necessary."
Last October, Petri introduced the Student Loan Auction Market Act which would require the Department of Education and Secretary of Treasury to study and pilot a market-based reform, such as an auction, to determine how the government might better determine lender yields while at the same time delivering quality service to borrowers. The House has voted twice in support of versions of this bill, but it has yet to be signed into law. "This is the idea that the Times once again endorsed," Petri said.
Petri noted that Federal Reserve Chairman Ben Bernanke has indicated support for a bidding process, or auction, for determining the participation of financial institutions in the FFEL program. In a letter to Sen. Chris Dodd (D-CT) on Federal Reserve action to help student lenders weather credit market turmoil, Bernanke noted that the structure of the FFEL program is problematic. He wrote:
"The other side of the profitability equation - the reimbursement spread paid to lenders under this program - is under the control of the Congress and the executive branch. In particular, Congress may well wish to revisit the question of whether setting a fixed spread over the commercial paper rate is the best approach. You may decide 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."
The New York Times editorial, printed on May 8, 2008 on page A30, follows:
May 8, 2008
Editorial
Toward Better Student Lending
President Bush showed good sense on Wednesday when he signed legislation to ensure an uninterrupted flow of federal student loans during the credit crunch. Now comes the test of leadership.
The new law will help lenders who have found themselves unable to raise money for new loans on acceptable terms — if at all. The difficulty has nothing to do with the quality of the loans. The government guarantees all federal student loans against default and guarantees lenders an interest rate set in law. But as capital has become costly and scarce, student lending has become less profitable, leading several dozen lenders to stop lending.
There was no real danger of students being left high and dry because plenty of lenders remain in the market and the government also offers loans directly. To keep the situation from deteriorating, the new law allows the Education Department to buy some outstanding loans, thus providing money to make new loans.
At the same time, however, the student loan crunch has shown that the private lending program is costlier and less reliable than it should be. Fixing it will mean standing up to lenders that have long reaped immense profits from the status quo and would no doubt prefer to revert to the old ways as soon as credit conditions permit. It is up to lawmakers and Mr. Bush to prevent that.
The major reform is to push for more direct government lending. Currently, direct lending accounts for about 22 percent of student loan volume, down from 33 percent in the mid-1990s. It has suffered as free market enthusiasts insisted that it is better for the government to subsidize lenders rather than make loans directly.
Various government reports, including President Bush’s own budget estimates, have shown that direct lending is a much better deal for taxpayers, and just as good for students. But ideology, reinforced by huge campaign donations from lenders, has created deep support for subsidized lending. Lenders have burrowed into the financial aid system, providing software and other support to colleges and universities and — as we learned last year — kickbacks to aid officers.
Then, when trouble loomed, some of the lenders who profited so well for so long headed for the exit. Direct lending won’t dry up when credit gets tighter.
Ideally, all student lending could be handled directly. But politically, that may be a long way off. In the meantime, subsidized lenders should be made to adhere to new rules. The ability to profit from government subsidies during good times should come with a reciprocal obligation, currently lacking, to hang tough in bad times.
And rather than simply provide generous subsides for lenders to make federally guaranteed student loans, lenders should have to bid for that profitable opportunity. Auctions would potentially raise tens of billion of dollars in revenue that could be used to improve grants and loan terms for college students. Free marketeers should cheer the development, because auctions would bring market forces to bear on a system that is currently nothing more than an expensive government giveaway.
Student lending always has been a government program designed to make college more attainable. The new law could be a first step toward that core goal — if political leaders will take the next necessary steps.
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