Playing the Class Warfare Card

The student loan industry’s campaign to save the Federal Family Education Loan (FFEL) program may have just hit a new low. Industry officials appear to be trying to stoke middle-class anger over President Obama’s proposal to use the savings from ending FFEL to make the Pell Grant program into a true entitlement for low-income students.

Don’t take our word for it. Just listen to what lobbyists for banks and student loan guaranty agencies have been saying lately:

“The president’s plan, although touted as a means of promoting higher education, is not,” Marcia Sullivan, director of government relations for the Consumer Bankers Association, said in a prepared statement. “The plan does not reduce the cost of student loans for a single student. Students and parents need to know that under this proposal, the government’s profits on student loans borrowed by middle income students will be used to finance other student aid.” — “Obama Slams Lenders and Colleges,” Inside Higher Ed, April 27, 2009 [Emphasis added]

“The proposal does nothing for the 10 million borrowers that need loans to pay for their education and training. In this interest environment, with rates close to zero, student borrowers should not be paying 6 percent interest for their loans. Therefore the needy students that do borrow are subsidizing the increase in Pell Grant awards.” — Press release from the National Council of Higher Education Loan Programs (NCHELP) on Obama’s plan [Emphasis added]

Similar points were made in an anonymous comment we received from a loan industry official to a recent blog post we wrote on Sallie Mae’s proposal to revamp the federal student loan programs:

“Why not tell your readers that the “savings” under the administration’s plan are primarily derived from charging borrowers more than necessary on their Direct Loans?… The administration’s proposal taxes middle income students for the purported purpose of financing grants to low income students. It makes college less affordable to borrowers who could be charged less on Direct Loans if the estimates of the federal cost of funds assumed by the administration were correct.” —“Relevant Critic,” April 17, 2009 [Emphasis added]

These claims are as silly as they are disturbing. As loan industry officials well know, the money to pay for the President’s plan to restructure the Pell Grant program would come from moving entirely to Direct Lending (DL) and eliminating the subsidies that lenders and guaranty agencies receive from the federal government, not from raising the costs of borrowing for students. Obama’s broader student aid plan actually seeks to ease students’ debt burden by making low-cost federal Perkins Loans more widely available so that students can avoid taking out more expensive and risky private loans.

Meanwhile, the cost of federally subsidized student loans for borrowers is already set to drop because of changes Congress made to the government’s loan programs as part of the College Cost Reduction and Access Act of 2007. Interest rates on these loans are currently 6 percent, but they will fall to 5.6 percent next year, and 3.4 percent by the 2011-12 school year (as of 2012-13, they are set to go back up to 6.8 percent unless Congress acts first). It’s unclear how much lower the Consumer Bankers Association and NCHELP would like to see them go.

Given that the primary goal of federal financial aid policy is to increase access to college, it makes far more sense for the government to use the savings from lender subsidies to boost spending on Pell Grants than to lower interest rates on student loans further. We haven’t seen any evidence to suggest that reducing the federal student loan interest rate would have an impact on the college-going decisions of financially needy students.

But all of this is really beside the point. Because after all, are we really to believe, based on these groups’ arguments, that they would drop their opposition to Obama’s plan if some of the savings from eliminating FFEL were used to lower interest rates further for borrowers rather than to increase Pell?

This is clearly an effort to try and manufacture grass roots opposition to the president’s proposal to end FFEL by playing on people’s age-old resentments.

We are far from the only ones disturbed by lenders’ and guarantors’ tactics. Recently, about a half-a-dozen financial aid administrators who support the FFEL program wrote into a listserv for aid officers complaining about the substance and tone of the arguments the loan industry have been making thus far. “I too support competition, and would prefer we kept both FFEL and DL,” one aid administrator wrote, commenting on another’s posting. “However, you hit the nail on the head. Those who want to retain FFEL are going to have to list rational, sound reasons demonstrating why this benefits students!”

That is good advice that the loan industry should take.