The Loan Industry’s Talking Points

With the U.S. House of Representatives poised to take up legislation that would eliminate the Federal Family Education Loan (FFEL) program and provide all federal student loans directly from the government, lawmakers opposed to the plan are coming armed with talking points straight from the student loan industry. Unfortunately for these legislators, many of the lenders’ arguments against the Direct Loan program just don’t stand up to scrutiny.

At Higher Ed Watch, we have expended a lot of ink (or at least a lot of blog space) over the last six months analyzing and critiquing the loan industry’s arguments. In preparation for House floor action on the legislation, we thought it would be a good time to revisit some of the lenders’ most dubious claims and to run excerpts from previous posts that responded to them.

Here are some of the arguments you’re likely to hear and our take on them:

Argument: By proposing to provide federal student loans entirely through the Direct Lending (DL) program, the Obama administration and Democratic Congressional leaders are trying to “nationalize” or impose a “government takeover” of the federal student loan program.

Our Response: “We have news for the lenders: it is impossible to nationalize a government program. By definition, the FFEL program is already a nationalized program because it is a government program, just like direct lending…Sorry, lenders; it’s a little late to complain about nationalization. Lyndon Johnson settled that fight a long time ago.” (Can You Nationalize a Government Program?)

Argument: Having the government make all federal student loans directly will substantially increase the national debt.

Our Response: “When a lender makes a loan on behalf of the government in the FFEL program, the federal government is on the hook for 97 percent of the principal of the loan. So, essentially the risks and obligations to the taxpayer of both of those [FFEL and DL) loans are nearly identical. To suggest that somehow we don’t have an increase to the national debt when the bank makes a loan that taxpayers are on the hook for is totally absurd.”

“It’s also important to remember in this debate that, according to the Office of Management and Budget, the Congressional Budget Office, and a lot of budget experts, the Direct Loan program is cheaper and, therefore, has less of an impact on the national debt.” (Debunking Student Loan Industry Myths)

Argument: If the legislation is enacted and student loans are made entirely through the Direct Loan program, students will lose the fundamental right available in FFEL to choose their own lenders.

Our Response: “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?”

“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.” (More Scare Tactics from the Student Loan Industry and Friends)

Argument: Using savings to end FFEL to increase spending on Pell Grants, rather than lowering the cost of borrowing for students, represents a redistribution of wealth that will ultimately harm middle-income students.

Our Response: “Given that the primary goal of federal financial aid policy is to increase access to college, it makes far more sense for the government to use the savings from lender subsidies to boost spending on Pell Grants than to “lower the costs of “federal student loans further.”

“We haven’t seen any evidence to suggest that reducing” the costs of federal “loans would have an impact on the college-going decisions of financially needy students.”

“Besides, the proposals under consideration do seek to ease students’ debt burden by making low-cost federal Perkins Loans more widely available so that students can avoid taking out more expensive and risky private loans.” (Playing the Class Warfare Card)

Argument: Republicans should oppose the legislation because it “kills jobs and greatly expands the federal government’s control of the education loan market.

Our Response: “The two federal student loan delivery systems (FFEL and Direct Loans) are part of the same government program that by law must provide loans with virtually identical terms to student borrowers. A move to 100 percent direct lending would certainly mean that fewer workers would be needed to run the program, even though all eligible students would continue to receive the same government loans they did before the change. In other words, fewer resources would be devoted to administering the same benefits provided by a government program.”

“One would think that Congressional Republicans would champion this lower-cost, smaller-government approach. But this is not your father’s (or your grandfather’s) Republican Party…In their support for the FFEL program, it appears that House Republicans want big government too — they just want to dress it up as private enterprise. Under FFEL, the federal government sets the terms of the loans while taxpayers insure private lenders against 100 percent of the interest rate risk, subsidize administrative costs, and cover all but a sliver of default losses on loans. How exactly does that arrangement make for smaller government than if the same loan were made directly from the Treasury?” (House Republicans Confused on Student Loan Debate)

Hopefully, we have added clarity to a debate that has been obscured by the loan industry’s disingenuous claims.

Stay tuned tomorrow for more coverage of House action on this important legislation.