To recap, there are two major loan programs: the Direct Loan Program, through which the government makes loans directly to students, and the Federal Family Education Loan Program (FFELP), where the federal government provides subsidies and reduces risks for banks and other business that make loans to students. For years, direct loans were shown to be cheaper for taxpayers, and, more recently, that they are less prone to conflicts on interest.
The Washington Post editorial argues Congress should not revisit the College Cost Reduction and Access Act, which cut subsidies to student loan companies and used the savings to make student loans easier to repay and to increase need-based student aid. Lenders have been pushing for lawmakers to revisit these subsidy cuts, because of the economic troubles (they call it a crisis) that some lenders in the FFELP are experiencing due to the credit crunch.
The Post points out that it would be silly to reinstate the previous subsidy levels, since there is already a more cost-effective program in operation (direct loans), and that the Education Department has made sure it is ready to make more loans to make up for any problems within the FFELP. Congress has also passed a bill to make sure all bases are covered in a worse case scenario.
Burns argues that the FFELP is now more cost-effective, and that subsidies should be increased. The Quick and Ed points out that that subsidy increases and costs to taxpayers have an inverse relationship (like global temperature and pirates). Additionally, there were still significant problems with the idea that FFELP is now more cost effective for taxpayers, as Higher Ed Watch pointed out some time ago:
In the President's Fiscal Year 2009 budget, the Federal Family Education Loan (FFEL) program and the Direct Loan program show similar per loan costs for 2008 and 2009, with the FFEL program showing a slight cost advantage for the first time. However, page 364 of the Budget Appendix notes that costs are higher for the Direct Loan program, because it holds nearly 100 percent of student loans that have defaulted (under FFEL and Direct Loans) and have been rehabilitated through consolidation.
Despite these problems, you can expect that loan industry talking points will always include a line about FFELP being more cost-effective. One thing they will probably not mention, however, is that it would be difficult to fund the benefits to students in the College Cost Reduction and Access Act without the subsidy cuts.
At a time of recession and pay-as-you-go rules, Congress would have a difficult time finding alternate sources of funding, which means that increases in need-based aid, income based repayment, public service loan forgiveness, interest rate cuts for student borrowers, and other important measures to make college more affordable may have to be eliminated or scaled down.
This brings us back to the original reason why the subsidy cuts were made in the first place: making college more affordable for students is more important than Sallie Mae’s bottom line.
Sorry for the long post!
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