Best Government Takeover Ever

In February, President Obama’s budget proposal for 2010 contained a plan that would help hundreds of thousands of students pay for college, stop wasting billions on corporate welfare to student loan companies, and create programs to increase college access and completion rates. This plan was taken up by the House of Representatives, which passed a bill — the Student Aid and Fiscal Responsibility Act (SAFRA) — based on the president’s initial proposal. Within the coming weeks, the Senate is expected to introduce its own version of the bill.

Things are indeed moving forward, but not without some significant, two-pronged opposition: As student loan companies are busy spending millions on a lobbying and public relations campaign to stop real reform, simultaneously, conservatives are opposed the bill on the grounds it’s a “government takeover” of the student loan industry. Through advertisements, emails to their borrowers, articles, speeches in Congress, and even rallies at their regional call centers, these well-financed opponents have done their best to spread misinformation about what the bill would do, and they’ve had some success in shaping the terms of debate.

Let’s ignore the circus for a second and focus on the realities of SAFRA.

The most contentious part of the bill is the reform of the student loan system, which is also the most confusing part for those unacquainted with federal financial aid policy. Basically, there are two government programs that provide the same loans to students: the Federal Family Education Loan Program (FFELP) and the Direct Loan Program (DLP). In the former, the federal government pays back the lenders when students default and provides subsidies to make loan companies more willing to lend to students at favorable rates. In the DLP, on the other hand, the government lends directly to students. Because it involves a “middleman,” FFELP costs taxpayers much more per loan. The non-partisan Congressional Budget Office has estimated that using the DLP for all future federal student loans would save $87 billion over 10 years.

If SAFRA is passed, this $87 billion would be invested in education. Specifically, the version of SAFRA passed by the House of Representatives would:

• Invest $40 billion in increasing the maximum Pell grant—given to the poorest of students—and make sure that the grants will increase each year by at least inflation plus one percent.
• Fund state and federal programs to increase college access and improve completion rates.
• Invest in community colleges and minority serving institutions.
• Make interest rates variable for Subsidized Stafford loans to allow students to benefit from low interest rates, while maintaining the interest rate cap, to protect them from high interest rates.
• Simplify the Free Application for Federal Student Aid (FAFSA).
• Reform and expand the Perkins Loan Program to give more students at more schools options than just private loans, which have high and variable interest rates and few borrower protections. Unfortunately, this would cause interest to accrue on Perkins loans while students were still in school.
• Create a completive grant program for early learning initiatives.
• Invest in campus modernization, which could include projects like retrofitting buildings to be more energy efficient or updating technology in classrooms.

Now that we know what the bill does, we should take a look at a few of the ridiculous claims being propagated by loan companies and conservative opponents. Here are three major myths currently making the rounds.

Myth: SAFRA is a big-government takeover of the student loan industry

Fact: Both the DLP and the FFELP are already government programs, administered by the Department of Education. Congress sets eligibility rules, maximum interest rates, subsidy rates, rules to help prevent conflicts of interest, rules about bankruptcy and default, minimum deferment and forbearance options, and more. The government has also stepped in to provide private companies with the capital to make new loans. In fact, some have pointed out that one reason the program doesn’t work is because subsidy rates are determined through a political process, subject to manipulation by special interests groups and not a market or auction mechanism. Using one government program as opposed to the other is not a government takeover. Private companies can continue to make student loans under SAFRA; they just won’t be getting government subsidies to do it.

Myth: Student loan reform will limit a student’s choice of lender

Fact: Students are more concerned about affordability than their choice of lender. This is especially true because, while some students can currently choose from many lenders, the choice is often close to meaningless. Most lenders offer very similar rates since the terms of federal loans are set by Congress, and because 68 percent of federal student loans originated by private companies are now financed through an emergency federal program. Additionally, while students can currently choose their initial ender, their loans are often sold to other companies without their consent, which effectively means that they do not have a choice about who will service their loans. Right now, the choice between using the direct loan program and a FFELP lender is up to the school, not the student. Most borrowers (as many as 90 percent ) choose their lender based on their school’s recommendation, hardly an exhaustive comparison.

Myth: Student loan reform means massive job cuts

Fact: The federal financial aid program is not a job creation program. The focus should be on how to make college affordable and accessible for students in the most efficient way possible for taxpayers. We cannot continue bad public policy and inefficient government programs to save jobs. There are better policy options for job creation.

Companies like Sallie Mae seem to be playing politics with jobs, frequently changing their job loss estimates, and exaggerating the impact that the legislation will have on their workforce. In fact, Sallie Mae seems to be bringing back more jobs from overseas than it says will be lost in the United States.

While reform will fundamentally change the student loan industry, it should not cause significant job losses. Lenders must still service student loans that are already on the books, and there will be more federal loans made to students than ever in future years—each of which must be serviced by employees working at private companies contracted by the federal government. Despite some claims to the contrary, these will be private sector jobs and they can be located anywhere in the country.

There are also many parts of the bill that will create jobs. SAFRA includes large investments in campus modernization, school construction, community colleges, early education programs, and grants to state governments to improve college access and completion. Ultimately, it’s likely that this bill will be a net job creator.

And because loan companies often do more than just federal student loans—like offer consultation services to schools and give private (“alternative”) student loans— well after reform is passed, many will continue to operate and employ people for these activities.

Comparing Student Loan Plans

Pedro de la Torre III is a former Advocacy Senior Associate at Campus Progress.

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