The Battle Ahead

President Obama sent shockwaves through the student loan industry last week when he called on Congress to dismantle the Federal Family Education Loan (FFEL) program next year and use the savings to turn the Pell Grant program into a true entitlement for low-income students by financing it entirely through mandatory funding. The announcement sent the stock prices of the nation’s largest student loan providers into a nosedive.

But investors need not panic, just yet. The Obama administration is sure to have a major battle on its hands — and not just from the usual suspects. While the president’s plan is unlikely to receive many Republican votes (save that of Rep. Tom Petri of Wisconsin, who has been a long time supporter of Direct Lending), the administration’s real challenge is going to be keeping members of its own party in line.

As we have previously reported, the student loan industry has gone to great lengths over the last two years to woo key Democrats. Sallie Mae outlined this strategy in an internal strategy document it produced shortly after the Democrats took control of Congress in 2006. That document, which was obtained by Rep. George Miller (D-CA) and published on this blog, laid out the student loan giant’s plans to target generous campaign contributions toward “Blue Dog and Financial Services Democrats,” as well as members of the Congressional Black and Hispanic Caucuses. A Higher Ed Watch investigation in July 2007 found that Sallie Mae had lived up to its pledge — donating, through its political action committee, more than $100,000 to members of these three groups in the first six months after the election.

The lender’s efforts paid off at least with some of the groups. For example, in February 2008, Sallie Mae and other student loan firms looked to the fiscally-conservative Blue Dog Democrats for help killing a measure in the House of Representatives that would have made it substantially easier for financially distressed borrowers to discharge their private student loan debt in bankruptcy. The loan companies were not disappointed. Altogether, 30 of the 47 Blue Dog members, many of whom were also on the House Financial Services Committee, joined Republicans in opposing the measure, ensuring its defeat. At the same time, more than a dozen Democratic members of the Financial Services Committee helped lead the charge for a massive government bailout of the student loan industry last spring — far beyond what was needed to ensure the widespread availability of federal student loans.

Meanwhile, the leaders of the Congressional Black and Hispanic Caucuses showed their sympathies for FFEL when they joined forces with USA Funds (which is closely aligned with Sallie Mae) and the Texas-based guarantor TG last summer to host a Capitol Hill event touting student loan guaranty agencies for their role in “enhancing higher education access and success for minority students.” In a letter to lawmakers announcing the briefing, the leaders of these groups praised guarantors for “support[ing] programs that promote higher education preparedness, access and success for students who are members of ethnic minority groups.” They specifically praised these agencies for financing scholarships, early awareness programs, and “research to promote college access for minority students.”

Speaking at the event, Marshall Grigsby, a USA Funds board member and a former top Democratic aide on the House Committee on Education and Labor, warned that if FFEL was abolished, guaranty agencies “will disappear” and take all the positive college access benefits with them.

The Power and Influence of Guaranty Agencies

For their part, guaranty agencies, many of which double as nonprofit lenders, are a particularly powerful force on Capitol Hill because of the political hold they have over lawmakers’ home state constituencies. Many guarantors are intertwined with state governments. For example, at least until recently, 16 of the 20 members of the board of the Pennsylvania Higher Education Assistance Agency (PHEAA) are state legislators equally divided between Democrats and Republicans. Three of the remaining seats are held by appointees of the governor, who is currently a Democrat. Governors and state legislators obviously have a lot of pull with their Congressional delegations.

Guaranty agencies are also a powerful force because they serve as major employers in representatives’ districts. By keeping these agencies in business — protecting the federal subsidies they receive through the federal student loan program — elected officials can take credit back home. How many lawmakers, Democrat or Republican, want to be accused of killing jobs in their home state, particularly at such an economically precarious time?

Leaning on Colleges

The student loan industry will also try to persuade college and university leaders, who are close to their Congressional delegations, to lobby to save FFEL. As we have seen with the “pay for play” student loan scandal, many colleges have strong relationships with student loan companies. Lenders like to defer to college officials to make their case because the schools are seen as being disinterested parties.

For the most part, the major national higher education associations are staying on the sidelines, waiting to see how this plays out. But one group, which has long had ties to the loan industry, has expressed concern about Obama’s plan. In a news release last week, the National Association of Student Financial Aid Administrators (NASFAA) pressed the Administration and Congress to “carefully consider all the implications related to eliminating the FFELP.” They especially warned that students and parents could be “negatively impacted by losing FFELP participant-provided services like college access programs, financial literacy education and loan delinquency and default prevention.”

In its press release, NASFAA expressed its concerns in a fairly muted tone. As the debate heats up in the coming months, we expect that the association’s concerns will grow louder. And if history is any indication, we’ll be hearing them from the group’s state and regional affiliates soon too.

A Pitched Battle

President Obama has offered a bold proposal that will substantially improve the federal financial aid programs. But that was the easy part. Now he’s got a long, hard fight ahead of him. We believe he can prevail, but to do so he will have to battle entrenched interests in his own party, who support the status quo. It’s not going to be pretty.

Ben Miller and Jason Delisle contributed to this report.