The Loan Industry’s Friends in Congress Go on the Attack

Earlier this week, we called attention to the fact that some of the student loan industry’s most fervent supporters in the financial aid world are potentially putting their schools and students at risk by refusing to take even the initial steps to prepare for the possible shift to direct lending next fall.

This is particularly worrisome, because as we wrote, no matter what happens with the student loan reform legislation that Congress is considering, the end of the Federal Family Education Loan (FFEL) program is coming. That’s because an emergency law that is currently propping up FFEL, the Ensuring Continued Access to Student Loans Act (ECASLA), is set to expire this summer and neither the Obama administration nor Democratic Congressional leaders are interested in extending it. So unless the financial markets improve enough so that lenders do not have to depend on federal financing to make government-backed loans to students, colleges will likely have to shift to direct lending.

Department of Education officials have been trying to get that message out. Late last month, Secretary of Education Arne Duncan sent a letter to colleges that have not taken any steps yet to start preparing for a possible conversion. “While there are encouraging signs that financial markets are rebounding, the most prudent course of action is for you to ensure that your institution is Direct Loan-ready for the 2010-2011 academic year,” he wrote. “That way, loan access to your students will be assured.”

The Education Secretary’s letter set off a firestorm of controversy on Capitol Hill, with the student loan industry’s closest allies in Congress falling all over themselves to be the first to condemn the Obama administration of strong-arming colleges. Both the Democrat Ben Nelson and the Republican Mike Johanns from the great State of Nelnet (whoops, we mean Nebraska) sent letters to Duncan (see here and here) last week expressing their outrage.

“The Obama Administration seems intent on denying competition and ramming through a federally-run student loan system,” Johanns said in a news release. “By encouraging institutions of higher learning to move quickly to a government-run system, it appears the White House is trying to end run Congress and strong-arm its way toward nationalizing the student loan industry.” [Note to Johanns, the FFEL program is a government program too.]

Rep. John Kline (pictured top left), the lead Republican on the House of Representatives Committee on Education and Labor, went even further. In his own letter to Duncan, he accused the Education Department of violating a federal law that prohibits government agencies from distributing “literature that promotes public support for or opposition to any legislative proposal on which Congressional action is not complete.”

“While this debate proceeds in Congress, the U.S. Department of Education must act as an impartial agent to assist colleges and universities, not as an advocate for its preferred legislative changes to the federal student loan program,” Kline wrote.

At Higher Ed Watch, we believe these allegations are outrageous. Duncan is not asking colleges to flip the switch and make the shift to the Direct Loan program right away. He is simply urging colleges to prepare for the possibility that they will have to transition to direct lending when ECASLA ends. This is indeed the prudent course to take.

After all, Obama adminstration officials know that if there are any disruptions in student loan delivery next year, Johanns, Kline, and Nelson will be among the first to go on the attack, accusing the Education Department of being inadequately prepared. In fact, these lawmakers want to have it both ways. They want to impede the Department’s efforts to get colleges ready for a possible conversion but then also be able to blame the administration if any mishaps occur.

These lawmakers’ constituents — the students and families in their states that rely on student loans to pay for college — deserve better. They need to know that the colleges that serve them are adequately prepared no matter what happens next fall.