Romney’s Tortured Logic On Reinstating the Guaranteed Student Loan Program

This was originally posted on Higher Ed Watch’s sister blog, Ed Money Watch.

Last week, Mitt Romney’s campaign released a document outlining the candidate’s proposed education policies. Student loans are still making headlines, and Congress remains deadlocked over a one-year extension of the 3.4 percent interest rate on some loans, so readers were no doubt eager to see what the Republican presidential candidate has in mind for the federal student loan program. Front and center is a proposal to reinstate guarantees and subsidies to private lenders making federal student loans, or as the document reads, “Reverse President Obama’s nationalization of the student loan market and welcome private sector participation in providing information, financing, and the education itself.”

The “nationalization” to which the paper refers is the 2010 law that Congress passed to terminate the portion of the federal student loan program administered by private lenders, the Federal Family Education Loan Program (FFEL), and replace it with an expansion of the existing direct loan program. Both programs were required by law to provide the same loans to students (Stafford loans, Parent PLUS loans, etc.), but the FFEL program had higher costs because it paid subsidies and fees to lenders and guarantee agencies.

So why bring back the old system of delivering federal student loans that Congress replaced in 2010 with a full conversion to direct lending? The Romney campaign makes the case with tortured logic, utter contradictions, and an embarrassing misunderstanding that taxpayers aren’t on the hook for federal loan guarantees.

It should be a simple concept that when the government promises to cover default losses on a loan a private lender makes to a student, and when the government makes the same loan directly, that taxpayers are no more or less exposed to risks and costs under either arrangement. The Romney campaign turns this concept on its head arguing that direct loans are problematic because they are an “obligation on the federal balance sheet” for which taxpayers are “left on the hook.” Of course, the same is true for guaranteed loans. (One wonders if this point has also eluded the Romney campaign with respect to a loan guarantee the government made to a certain solar panel manufacturer.) Here’s how the Romney campaign sidesteps that important detail:

When the Obama Administration and the Democratic Congress nationalized the student loan market, they drove away private lenders and moved a trillion-dollar obligation to the federal balance sheet… And now that Washington has taken over the federal loan system, the Department of Education operates as one of the largest banks in the country, with taxpayers left on the hook.

It is also troubling that it appears the Romney’s campaign believes “a trillion-dollar obligation” (a massively inflated figure that the campaign must have confused with total outstanding student loans) in guaranteed student loans would be better left off the books and unaccounted for in the budget deficit and federal spending. How else should one interpret the statements above?

Moving on to the tortured logic the Romney campaign uses to argue for a return to the FFEL program:

Romney supports private-sector involvement to ensure students are clearly informed about their obligations when they apply for federal student loans, and that they receive support that goes beyond a call from a collections agent to help keep them on track to repayment.

The proposal here is straightforward. Private lenders will do a better job of informing and supporting students and borrowers than the direct loan program. No argument here, except private companies already perform those functions in the direct loan program. Take a look at the roster of private companies the Department of Education has hired—through competitive bidding—to process student loans, inform borrowers, and collect payments.

The Romney campaign would do far better to describe how the Department of Education could improve the requirements and incentives for these contractors to make the system work better for borrowers, instead of drawing a false and poorly-informed distinction between the direct loans and guaranteed loans.

And now for the utter contradiction of the Romney proposal to reinstate the FFEL program:

A Romney Administration will eliminate [education] programs that are duplicative, inefficient, or ineffective and concentrate available funds directly on helping students. [Emphasis added]

As explained earlier, the FFEL program made the same loans to students as the direct loan program did. The terms for borrowers (e.g. interest rates, repayment programs, etc.) were nearly identical. In that regard, the FFEL program was exactly the kind of duplicative and costly program the Romney campaign should support ending. Instead, Romney would bring it back, adding duplication to federal education programs.

Moreover, if the Romney campaign’s measure of an inefficient education program is one that costs 66 percent more than another program that provides the identical service, then the FFEL program should be market for elimination, not resurrection. (That figure is taken from a Congressional Budget Office study that uses fair-value accounting, a method that the student loan industry favors.)

Given that public anxiety over student indebtedness has never been higher, and Congress is struggling to reform student loan interest rates, the Romney campaign’s proposal to ramp up subsidies for private lenders as some sort of solution looks completely disconnected from reality.