More Scare Tactics from the Student Loan Industry and Friends

Now that legislation is moving forward that would carry out President Obama’s plan to eliminate the Federal Family Education Loan (FFEL) program, the student loan industry and its most hard-line supporters in the financial aid world are doing what they do best: spreading fear about proposed changes to the student loan programs that would be harmful to their interests.

Take, for example, the Consumer Bankers Association (CBA). In a press release last week, the group wrote that the House Education and Labor Committee’s approval of the bill was “a setback for students.”

Come again? The legislation would use savings from ending FFEL to boost spending on Pell Grants by $40 billion (yes, you read that right — 40 BILLION DOLLARS) and significantly expand the low-interest Perkins Loan program so that financially needy students can avoid taking out high-cost private student loans.

So how exactly would the bill’s passage harm students?

According to the CBA, if the legislation is enacted and student loans are made entirely through the U.S. Department of Education’s Direct Loan (DL) program, “students and parents would no longer have a choice of lenders, a right they’ve had since 1965.”

A group of financial aid directors — who appropriately call themselves “the Friday the 13th Group” — made the same point in a letter they sent to lawmakers in April opposing President Obama’s proposal. “By eliminating the FFEL program, we essentially remove the ability for borrowers to choose a lender,” the group wrote. “This inherent freedom has been available for more than 40 years.” (“Inherent freedom? Are you kidding me?” a financial aid administrator who supports the continuation of FFEL but is critical of the group’s approach wrote recently on a listserv for aid officers. “Now freedom of the press, freedom of speech, freedom of religion – those are inherent freedoms.”)

At Higher Ed Watch, we understand the appeal of this argument. But we also know that it is nothing more than a red herring.

If there is anything that we learned from the “pay for play” student loan scandal, it is how little choice borrowers in the FFEL program actually have. Don’t forget that in 2007, the Education Department found that one lender made at least 80 percent of students’ federal loans at 921 participating colleges. That same year, the research firm Student Marketmeasure reported that 1,412 FFEL schools had one loan provider that made 80 percent of their students’ federal loans, with 531 of those colleges recommending only a single lender to their students. What kind of a choice is that?

Now we know that Congress took steps last year, as part of the Higher Education Act reauthorization legislation it approved, to give students at least a modicum of choice. Under the measure, colleges that have “preferred lender lists” will be required to recommend at least three lenders to their students. That provision has not yet gone into effect, as the U.S. Department of Education has only today released proposed rules to carry it out. Regardless, nothing in these regulations will prevent colleges from continuing to steer the vast majority of their students to a favored lender.

The truth is that students don’t really have much of a choice in the FFEL Program. Most financial aid administrators provide a preferred lender list — which in and of itself narrows down their students’ choices. The vast majority of students stick to their aid administrators’ recommendations. Notice that most lenders who have tried to buck this trend — like MyRichUncle — have ultimately failed.

Perhaps the most hollow part of the “borrower choice” argument is the fact that a lender making FFEL loans is not allowed under program rules to significantly differentiate its product from other FFEL lenders. This is because all lenders must disperse Stafford loans and PLUS loans that have the same terms for borrowers, with only some room to offer slightly more generous interest rates than those required by law. Given that the loans are the same, why is borrower choice so important? It’s really only important if you’re a student loan company.

At a House Committee on Education and Labor hearing in May, Rep. Tim Bishop (D-NY) said that the lenders’ claim that students would lose choice under the President’s proposal was “a seductive argument.” However, having been a college administrator for 29 years before coming to Congress, he said it just didn’t ring true.

“I never once heard a student say, ‘Gosh, I wish I had a choice,'” Bishop said. “They were grateful to know that that there was a source of money available to them.”

The financial aid administrator who wrote into the financial aid listserv criticizing the Friday the 13^th group’s letter agreed.

“Most students don’t even know who their lender is. With the main point being — they don’t really care,” he wrote. “Students are just interested in getting their money. They are not concerned about who is providing it to them.”

He added, “I am supportive of maintaining both the DL and FFEL programs.” But if ensuring student choice “is our biggest argument for saving FFELP (and I have to assume it is because it was listed first in the letter), then FFELP is in big trouble,” he stated.

We couldn’t have said it better ourselves.

Jason Delisle contributed to this post.