|
The House Education and Labor Committee approved legislation Tuesday to end the Federal Family Education (FFEL) program in favor of the Direct Loan program. Rep. Tom Petri (R-WI), a member of the committee, hailed the move as "long overdue and very much welcome."
"I started advocating student loans made directly by the government in 1983 as an alternative to the wasteful FFEL program, and after years of explaining my approach, and years of defending direct loans from misleading attacks by the private student loan industry, we are an important step closer to settling the debate," Petri said. "Ending FFEL will save the taxpayers $87 billion over 10 years, according to the Congressional Budget Office, while providing students with even better loans through the Direct Loan Program."
Petri first became interested in student loan reform when, in the early 1980s, the head of the Wisconsin higher education agency convinced him that the FFEL program was wildly costly to the government. FFEL is a federal program which uses private capital to fund student loans but receives a federal subsidy to ensure a guaranteed rate of return. The federal government also provides a guarantee on these loans. Thus, if a student defaults, taxpayers are on the hook, not the private lender.
"The private lenders are an unnecessary profit-making level of bureaucracy within the FFEL program. With profits coming from the taxpayers, it's not private enterprise," Petri said.
Although he introduced his first direct loan proposal in 1983, getting it enacted has been a step-by-step process.
With the government making the loans, Petri determined, loans could be kept affordable by making them "income-contingent." If, after leaving college, technical or graduate school, a borrower loses a job, gets sick or has other income difficulties, the loan can be automatically rescheduled, stretching out the payments.
In 1992, Petri convinced Congress to approve a plan converting most student loans in or near default into income-contingent loans. He also won approval of a test program to make direct loans available at up to 500 schools nationwide, including Marquette University in Milwaukee.
In 1993, Petri worked with the Clinton Administration to pass legislation making direct loans widely available from the Education Department. Income-contingent repayment was offered as an option - one which has become increasingly popular over time.
The Direct Loan Program uses the proceeds from the wholesale auction of Treasury securities to the private sector to fund loans to students, and all servicing and bill collection is handled by private companies operating through performance-based contracts. The loans are delivered to students through the same system that universities use to disburse Pell Grants.
While the Direct Loan program was established as an alternative to FFEL, Petri was convinced that it would prove so successful that the older program would eventually be ended. The private lenders who operate under FFEL may have come to the same conclusion and in response intensified their lobbying and political fundraising activities while comparing the two programs in ways which Petri calls "blatantly deceptive."
Schools generally choose between the two programs when deciding how to help students to finance their educations. The private lenders began an aggressive campaign courting college loan officials to choose FFEL. Their success enabled them to claim that the Direct Loan program was a failure.
Then a series of scandals ensued. It was found that from 2001-2006 nonprofit lenders illegally claimed, according to one estimate, over $1 billion in improper subsidies by knowingly manipulating a loophole in the law. And then there was the "pay for play" controversy when it was revealed that college aid administrators and Department of Education officials in charge of overseeing FFEL received special favors, benefits and kickbacks from lenders in exchange for steering students to their loans.
When the financial crisis hit in late 2008, several private lenders had difficulty raising private capital and turned to the Treasury for help. With the atmosphere radically altered, President Obama's first official budget proposal recommended eliminating FFEL and switching 100 percent to direct loans. With the Congressional Budget Office determining that the move would save $87 billion over 10 years, the case for FFEL became increasingly hard to make.
With H.R. 3221 expected to be approved by Congress and signed into law, Petri says there is one major component of his original proposal left to accomplish. Petri believes that direct loans should be repaid along with one's taxes.
"It would simplify the process," he says. "Your loan payment would be included with your tax withholding at work, and when you file your taxes, your payments would automatically be rescheduled based on your taxable income. It's sort of 'one-stop shopping.'"
#####
Rep. Petri's statement at today's Education and Labor mark-up can be found at: http://petri.house.gov/video/StudentLoanMarkup.shtml and http://www.youtube.com/TomPetri
Text of his statement follows:
Congressman Thomas E. Petri
Mark-up of H.R.3221 The Student Aid and Fiscal Responsibility Act of 2009
July 21, 2009
Mr. Chairman, I support the bill before us today.
As you know, for over two decades I have championed the Direct Loan Program as the most efficient, stable, and cost effective federal student loan program. It has been a pleasure working with you, Mr. Chairman, on this issue over the years, and the move to 100 percent direct lending marks an important step forward for students, parents, and taxpayers. It is my hope that, in the future, we can implement the final stage of transforming our federal student loan program by allowing students to repay their loans on an income-contingent basis through the income tax withholding system.
In contrast to what you will hear from many of my colleagues today, currently we have two federal student loan programs that provide the exact same student loans to borrowers. The Federal Family Education Loan Program is a federal program, which uses private capital to fund student loans but receives a federal subsidy to ensure a guaranteed rate of return. The federal government also provides a guarantee on these loans. Thus, if a student defaults, taxpayers are on the hook, not the private lender.
By moving to 100 percent direct lending, we are not nationalizing the federal student loan program. Rather, we are eliminating the federal loan program that has been fraught with scandal, is an unreliable source of funds, and costs billions more for taxpayers.
Originating all new loans through the Direct Loan Program will ensure that students and parents have a stable and reliable source of funding for student loans. Borrowers will continue to benefit from private sector customer service, only this would be achieved -- as it always has been in the Direct Loan Program-- through a competitive-bidding process which would allow the U.S. Department of Education to select private servicers based on how well they serve borrowers, provide financial education, and prevent loan defaults. This is an important change from the perverse incentives that currently exist in FFEL, which actually provide a financial incentive to collect on defaulted loans rather than preventing them.
According to CBO, eliminating the FFEL program and moving to 100 percent direct lending will result in nearly $87 billion in savings. For years, these savings have lined the pockets of lenders and guaranty agencies at the expense of students and taxpayers.
However, now these savings will be redirected to help students graduate with less debt and make college more affordable. Furthermore, taxpayers will benefit because this bill directs $10 billion of the savings towards deficit reduction. While I am happy that the Chairman recognizes the importance of directing a portion of the savings to deficit reduction, I would have preferred, and have long advocated for, more savings being directed towards deficit reduction instead of used to create and expand several programs including, school construction. Furthermore, Mr. Chairman I hope that we can work together before floor consideration to ensure greater accountability and cost effectiveness in the servicing contracts for the non-profits.
I know that some of my colleagues are concerned that the transition to direct lending will be burdensome for schools, but Student Lending Analytics just published a survey of institutions that recently moved to direct lending.
73 percent of these institutions reported that the switch to direct lending was easier than they thought. Only 4 percent said it was more difficult. 61 percent said the burden of administering the Direct Loan Program was less than the FFEL program, and 24 percent said it was the same. 84 percent said they neither had to increase nor decrease the number of the staff to administer the Direct Loan Program.
Mr. Chairman, although it appears that the schools are reporting a smooth transition to the Direct Loan Program, it is important that we continue to monitor the transition to ensure that the Department of Education is addressing any problems encountered by schools.
And finally, today's legislation creates a new Community College Grant Program that aims to strengthen community colleges in order to better prepare our workers for the jobs of the future. I believe Wisconsin has long served as a model in this area, for both our Technical School system and University of Wisconsin two-year colleges provide valuable yet distinct roles in addressing the workforce and educational needs of the state. Mr. Chairman, while it appears that both of these types of institutions would be eligible for funding under this program, I ask your assistance in clarifying the language before floor consideration to ensure their eligibility.
Let me conclude by again noting the great achievement and importance of moving this bill forward today. We are not favoring government over the private markets. Rather we are eliminating the federal guaranteed loan program which for years has been a gravy train for lenders and guaranty agencies, and moving to the Direct Loan Program which is structured in the interests of students and taxpayers.
|
