Grilling Education Secretary Margaret Spellings

As Secretary of Education Margaret Spellings steps up to the plate today at a House Education and Labor Committee hearing, Higher Ed Watch has a curveball to throw her way. We would love to hear the Secretarys response to the following question:

Why hasnt the Bush Administration lowered interest rates for Direct Loans to match the lower interest rates being offered by some Federal Family Education Loan (FFEL) lenders like MyRichUncle? The Higher Education Act (Section 455) mandates that the Direct Loan program provide “the same terms, conditions, and benefits” as the FFEL program. Reducing Direct Loan interest rates to 5.8%, as MyRichUncle has for FFEL loans, would save the typical student borrower $1,000 in student loan payments. Because every government study says the Direct Loan program is cheaper for taxpayers than the FFEL alternative, lowering Direct Loan interest rates to match MyRichUncles would result in zero increased taxpayer costs. In fact, the government would save money that could then be used to increase funding for programs like Pell Grants. In 1999, former Secretary of Education Richard Riley enforced this provision and lowered Direct Loan program fees to match the lower fees that FFEL lenders were offering. Why arent you enforcing the law?

BACKGROUND

Section 455(a) of the Higher Education Act (HEA), which governs the Direct Loan program, states: “Unless otherwise specified in this part, loans made to borrowers under this part shall have the same terms, conditions, and benefits, and be available in the same amounts, as loans made to borrowers under sections 428, 428B and 428H [FFEL program] of this title.”

The 1998 Amendments to the HEA and the subsequent negotiated rulemaking process made it easier for lenders in the FFEL program to charge reduced up-front loan fees, or origination fees, to borrowers. In turn, many FFEL lenders began reducing their origination fee below the 4% fee being charged for Direct Loans. FFEL lenders were hoping to use these cheaper loan terms to convince colleges to switch out of the Direct Loan program.

Former Secretary of Education Richard Riley decided to follow suit in June 1999 in order to keep direct lending competitive. He announced a one percentage point reduction in the origination fee for Direct Loans from 4% to 3% of the total loan balance. He interpreted the language of Section 455(a) to mean that any discounts offered to students in the FFEL program must also be made available to students in the Direct Loan program: “We believe Congress intended to give students the same benefits for loan fee discounts in both the FFEL and Direct Loan programs. Providing students with similar benefits is good public policy and is consistent with our legal authority and the legislative history of the HEA.”

A group of student lenders and lobbyists (Sallie Mae, the Education Finance Council, the National Council of Higher Education Loan Programs, and several major banks, including Bank One and Citibank’s Student Loan Corporation) decided to sue the Education Department in November 2000 for acting illegally to give the Direct Loan program a competitive edge. They maintained that the origination fee discount and a separate discount on interest rates that Riley announced in 2000 were illegal, for different reasons. According to the lenders, the reduction in the origination fee broke the law because Section 455(c) of the 1998 Amendments to the HEA specifically set the origination fee for Direct Loans at 4%. They argued that only Congress could lower the fee through the legislative process.

The Department of Education maintained that it had the authority to equalize loan benefits between the two programs: “The fee reduction and the repayment incentives challenged by the lenders in their lawsuit save students and parents money, are in the best interests of the taxpayer, and help prevent defaultsThey are entirely consistent with the Departments legal authority.”

The lawsuit was contested by both the Clinton and Bush Administrations, and was eventually dropped. Both Administrations acknowledged that there was a conflict of language between Section 455(a)s requirement of “the same terms, conditions, and benefits” and the language in Section 455(c) that the Secretary “shall” charge an origination fee of 4%. They argued that the Secretary was interpreting the statute as a whole in order to give meaning to all statutory provisions, and that nothing in the 1998 amendments indicated that Congress intended to deny reduced loan fees to Direct Loan borrowers. In addition, the Administrations contended that the lenders did not have legal standing to sue, as they did not prove that they were harmed by the Departments actions: “The asserted discrimination, if it exists at all, is a result of plaintiffs failure to provide discounts to their own borrowers.”

But the key is that there were two seemingly conflicting provisions in the fee reduction case. There’s no prohibition anywhere against the Secretary reducing Direct Loan interest rates to match available FFEL rates. So why isn’t she doing it?