Obama’s Trump Card

Prospects for President Obama’s proposal to eliminate the Federal Family Education Loan (FFEL) program remain uncertain. Democratic leaders in the U.S. House of Representatives and the Senate continue to be divided over whether or not to go forward with a controversial budget procedure known as budget reconciliation, which would make it significantly easier for the President to get the votes he needs to achieve his goal.

But even if the White House fails to persuade Congress to move ahead with its plan this year, the student loan industry will not be able to rest easy. That’s because the administration has a trump card up its sleeve. An emergency law that is currently propping up FFEL– the Ensuring Continued Access to Student Loans Act (ECASLA) — is set to expire in about a year and a half, and the Obama administration doesn’t appear to have any intention of asking Congress to renew it.

Robert Shireman, a senior advisor at the U.S. Department of Education, said as much at an event here last week on “The Future of Federal Student Loans” when he responded to a concern that the administration was rushing through its plans to overhaul the federal student loan programs. Regardless of whether the proposal to end FFEL goes through, “ECASLA only goes until this next coming year,” he said. “A decision has to be made.”

Last spring, Congress effectively shored up the system by allowing the Education Department to buy FFEL loans and lend federal money to lenders. In other words, the bank-based program’s survival now increasingly depends on the government providing federal capital to lenders to make the loans.

ECASLA covers loans only through the 2009-10 school year and officially expires in September 2010. Some loan industry officials have floated the idea of making the emergency law permanent. But the Obama administration doesn’t see the need for the government to run what has become essentially a second Direct Loan program — particularly when the existing one is working so well. “The Direct Loan Program, which uses market process to determine subsidy payments to servicers, has suffered no disruptions and continues to function at lower cost to taxpayers,” the President’s budget overview states. “The Administration’s goal is to continue to tap low-cost, stable sources of capital so students are ensured access to loans.”

So the loan industry pretty much has to decide between taking the types of consolation prizes that the White House is offering now (Note to guaranty agencies: $500 million in mandatory spending a year for your college access work is surely better than nothing!); coming up with an alternative reform plan that may or may not be acceptable to the administration and Congress; or hoping against hope that the financial markets improve enough that they are not at all dependent on federal financing to make government-backed loans.

Although they may not fully realize it, colleges and students have a lot riding on the outcome of this debate. Under the President’s plan, money saved from ending FFEL would be used to turn the Pell Grant program into a true entitlement for low-income students by financing it entirely through mandatory funding. Achieving a Pell entitlement has long been a dream of student aid advocates, including, incidentally, the National Association of Student Financial Aid Administrators, which opposes Obama’s plan.

But if the Obama administration loses the battle this year, and simply allows ECASLA to expire, there’s no guarantee that the savings would go anywhere but to deficit reduction — and that would truly be a wasted opportunity.