Keeping Non-Profit Loan Agencies on a Pedestal

Which student loan industry group has the most clout in Washington? Judging by the student loan reform bill that Congress is poised to enact, the hands-down winner would have to be the Education Finance Council (EFC), a trade association for non-profit student loan companies. The organization has clearly benefited from the common perception on Capitol Hill that non-profit student loan agencies are more upstanding than their for-profit peers — which, as we’ve said before (see here and here), is a dubious proposition indeed.

As we recently reported, the pending legislation, which would eliminate the Federal Family Education Loan (FFEL) program, includes a set-aside for non-profit loan agencies taken from a proposal that EFC quietly shopped around Capitol Hill last summer (and that Higher Ed Watch was the first to make public). The measure would give each and every one of EFC’s nearly 30 members a no-bid contract to service the Direct Loans of up to 100,000 students attending institutions in their home states.

Just how big a benefit will this be for the association’s members? Consider this: while most of the student loan industry is warning of the job losses that will occur after the bill passes (claims that in many cases have been wildly exaggerated), a top official with the Missouri Higher Education Loan Authority (MOHELA) has indicated that his agency will soon be posting job ads. “It’s very possible we’ll need to hire 400 to 600 more people,” Will Shaffner, the agency’s director of business development, told the St. Louis Post-Dispatch earlier this week.

At Higher Ed Watch, we have repeatedly stated our opposition to this provision, which is obviously a giveaway to wavering Democrats with close ties to the loan agencies in their states. We find this provision particularly troublesome because the history of FFEL is replete with these types of political tradeoffs and carve outs, which have made the program administratively cumbersome, inefficient, and vulnerable to waste, fraud, and abuse.

To be absolutely clear, we have no problem with encouraging non-profit lenders to compete for a servicing contract from the Department of Education. But they should not be treated more favorably — or compensated more generously — than their competitors.

Having said that, the provision in the final bill is at least a little less of a giveaway than an earlier version that was included in the student loan reform legislation that the House of Representatives approved in September.

Most significantly, the reconciliation bill gives the Secretary of Education the authority to penalize non-profit servicers that perform poorly. Under the legislation, the Secretary would be allowed to “reallocate, increase, reduce, or terminate an eligible not-for-profit servicer’s allocation of servicing rights” based “on the performance of such servicer.” The original House bill would not have given the Education Secretary that tremendously important power.

In addition, the final bill leaves out a provision that EFC fought to get into the House bill to sweeten the pot for its members. That legislation would have required the Education Secretary to set the payment rate for non-profit servicers at a level that was “commercially reasonable in relation to the volume of loans being serviced” and was high enough so that “the eligible non-for-profit servicer can reasonably provide any additional services, such as default aversion or outreach, provided for in the contracts awarded.” Under the reconciliation bill, the non-profit servicers would simply be paid “a competitive market rate” as determined by the Education Secretary.

These are certainly improvements. And in the grand scheme of things, we recognize that the carve out for non-profit loan agencies is a small price to pay for a landmark student loan reform bill that probably couldn’t have passed without it.

Still, we find it remarkable that lawmakers are still putting these loan agencies on a pedestal — despite all of the scandals surrounding them in recent years (the 9.5 rip-off, kickbacks to colleges, excessive executive compensation and wasteful spending, and, at least in one case, the suspected gaming the lender-of-last resort program). In the end, that very well may be the Education Finance Council’s most impressive accomplishment.