Exclusive: Non-Profit Lenders Seek No-Bid Contract and Entitlement

What if a defense company was secretly working the back halls of Congress to secure a no-bid contract to build a fighter jet? Or what if a handful of non-profit health insurers were lobbying Congress to divide up the country and grant them legislatively guaranteed monopolies to manage government health benefits? The public would surely be outraged. Yet a trade association for non-profit student loan providers, the Education Finance Council (EFC), has taken a similar approach with its proposed alternative to federal student loan reform under consideration in Congress.

This week Higher Ed Watch received from an anonymous source a copy of the proposal EFC has been shopping to a select group of Congressional offices. EFC confirmed it had crafted the proposal sent to us, but the association has not publicly released it, nor does it mention it on its website.

In its proposal, EFC calls on Congress to guarantee that all currently operating non-profit loan companies and servicers (such as a few guaranty agencies) will be given the servicing rights for a minimum number of federal student loan borrowers attending an institution in their home state. The proposal defines this minimum level as either 100,000 or the total number of borrowers within the state, whichever is less. Thus the proposal seems to suggest that borrowers would be assigned a non-profit loan servicer by the federal government. Has EFC compromised on its key loan program principles – competition and borrower choice – to guarantee its members a role in a new loan program?

Peter Warren, EFC’s president, defended the group’s plan in an e-mail to Higher Ed Watch, writing “there is certainly no less choice here” than under the administration’s plan, which would provide contracts to a handful of companies to service all future federal student loans. (The Department recently awarded contracts to four companies, including Sallie Mae and the non-profit Pennsylvania Higher Education Assistance Agency to service loans that lenders have sold to the government under the Ensuring Continued Access to Student Loan Act.) He added that the proposal would allow other companies to compete for servicing business in states in which there are more than 100,000 borrowers.

While the Obama administration’s plan would also assign borrowers a servicer, it at least requires that servicers compete in a bidding process to win a contract. No such competitive bidding takes place under the EFC plan: it is a no-bid contract. EFC includes a competitive bidding gesture in is proposal, stating that compensation under the guaranteed contract would be set by the Department of Education using “market-based rates.”

The second component of EFC’s proposal is a new federal entitlement for non-profit servicers to provide college outreach activities to students. Loan servicers would receive $10 for each student enrolled in an institution of higher education in the state in the previous academic year. Servicers in small states would collectively be guaranteed a minimum of $2.5 million. Again, the EFC proposal jettisons competition in favor of a politically-determined guaranteed payment stream from the federal government.

Warren argues that this aspect of the proposal is appropriate because “the non-profit lenders are the ones who are currently carrying out these outreach activities, have vast experience in doing so, and have successful programs in place that should not be summarily discontinued.”

But non-profit lenders are hardly the only entities carrying out these types of activities. At Higher Ed Watch, we believe borrowers and students would be far better served by entities that won competitively awarded grants to provide financial literacy, college preparation, and college access programs.

As Congress considers student loan reform in the coming weeks, non-profit lenders and guarantee agencies will continue to flex their political muscle. But lawmakers should put good policy ahead of politics and see the EFC proposal for what it really is.