Budget Cutters Should Take Aim at Set Aside for Non-Profit Student Loan Servicers

As the White House and Congressional leaders look for areas of wasteful government spending to cut, we would urge them to consider eliminating a set-aside for non-profit student loan agencies that Congress created as part of last year’s student loan reform legislation.

The Health Care and Education Reconciliation Act of 2010 ended the Federal Family Education Loan (FFEL) program and shifted the federal student loan program to 100 percent direct lending. As a result, student loan corporations are no longer allowed to originate federal student loans, such as Stafford Loans and GRAD PLUS loans. But some of these companies can continue to participate in the federal student loan program by servicing Direct Loans on behalf of the government. In other words, these companies can help the U.S. Department of Education to administer the Direct Loan program but can’t make loans themselves — which is a far less lucrative arrangement.

The legislation set up two separate paths student loan companies can take to become Direct Loan servicers. The measure included a proposal from the Obama administration requiring eligible entities to compete in a bidding process to win a contract from the U.S. Department of Education to service these loans. The Education Department is currently working with four loan companies it selected through this competitive process — two for-profit corporations, Sallie Mae and Nelnet, and two non-profit student loan companies, the Pennsylvania Higher Education Assistance Agency (PHEAA) and the Great Lakes Higher Education Corporation — to service the vast majority of these loans. The Department pays these companies out of its student aid administration budget, which is set through the annual appropriations process.

But under pressure from some of their caucus members, Democratic Congressional leaders also agreed to include a carve-out  for non-profit loan agencies that was taken from a proposal that the Education Finance Council, the companies’ trade group, quietly shopped around Capitol Hill (and that Higher Ed Watch was first to make public). The final bill essentially guaranteed each of EFC’s nearly 30 members a no-bid contract to service the Direct Loans of up to 100,000 students. These agencies, which will be paid through savings achieved by ending the FFEL program, are expected to start servicing loans later this summer. The funding for these lenders is written into law for multiple years in the future.

At Higher Ed Watch, we have repeatedly stated our opposition to this provision, which was included in the legislation for purely political reasons — to win over wavering Democrats who had close ties to the student loan agencies in their home states. It was just these sorts of political trade offs and carve outs over the years that made the FFEL program so cumbersome, inefficient, and vulnerable to waste, fraud, and abuse.

To be clear, we don’t have any problem with encouraging non-profit loan companies to compete for a servicing contract from the Education Department. But, as we’ve said before, they should not be treated more favorably — or compensated more generously — than their for-profit competitors.

We would imagine that the White House would support our proposal to rescind the set-aside, which would save the government $730 million over five years and $1.2 billion overall, based on the original cost estimates of the provision done by the Congressional Budget Office in 2010. After all, Congress included this provision over the Obama administration’s objections. In September 2009, for example, the White House Office of Management and Budget (OMB) urged House lawmakers to stick to using “a competitive contracting process” to select servicers. “For the sake of taxpayers as well as students, entities providing student loan services should be selected based on performance and cost,” the OMB wrote in a “Statement of Administration Policy” on the initial version of the House bill.

But House Republican leaders, who have long been champions of the student loan industry, wouldn’t go for it, right? Think again. In the report accompanying the House-passed fiscal year 2012 budget resolution (see p. 97 of the document) that the chamber approved last month, the House Budget Committee said that lawmakers should consider eliminating the mandatory set-aside for non-profit loan servicers. The student loan reform bill “established two separate funding categories for Direct Loan servicing contracts, a mandatory stream for eligible non-profit servicers and a discretionary stream for other servicers,” the report states. “Both of these types of servicers should be funding with discretionary funds.” In other words, these lenders shouldn’t be guaranteed anything. They should have to compete with other loan companies to win a limited number of contracts.

We couldn’t agree more. At a time when the country is facing multi- trillion-dollar budget deficits, we no longer can afford such unnecessary wastefulness.