| The Democratic-led House of Representatives, in a | | | | challenging this much-publicized “$87 billion in |
| 253 to 171 vote on September 17, easily passed | | | | savings” figure. In a piece for The Hill, |
| landmark legislation that would bring an end to the | | | | Representative John Kline from Minnesota, ranking |
| long-standing Federal Family Education Loan Program | | | | Republican on the Education and Labor Committee, |
| (FFELP), the program initiated by the Higher Education | | | | argued that the projected $87 billion in savings |
| Act of 1965 to offer college students federally | | | | ignores long-term, standard risks, failing to allow for |
| guaranteed student loans via private lenders. | | | | interest-rate fluctuations and default risks on college |
| As the measure awaits a Senate vote scheduled for | | | | loans. |
| October 15, representatives for the FFELP student | | | | The purported savings, holds Kline, “are in large |
| loan industry along with prominent Republicans have | | | | measure actually new earnings the federal |
| been stepping up their attack on the key mandates | | | | government will take in from student loan borrowers |
| of the bill, which they say will not only cost students | | | | paying the government a higher interest rate than |
| and schools the competitive pricing and choices in | | | | the government’s cost of funds” |
| student loans offered by the private sector but will | | | | (“Student Lending Faces Government |
| saddle taxpayers with billions of dollars in new costs. | | | | Takeover,” TheHill.com, Sept. 14, 2009). |
| Federal Student Loans: FFELP vs. Direct Loans | | | | Since borrowers’ interest rates on federal parent |
| Under the existing FFEL program, the government | | | | and student loans are fixed, as market interest rates |
| pays private FFELP lenders a subsidy for the federal | | | | rise from their current recession lows, the |
| student loans these lenders originate — in | | | | government’s cost to fund direct student loans |
| essence, paying a third party to act as a middleman | | | | will rise while earned borrower interest remains the |
| in issuing government student loans. | | | | same — meaning that the projected savings |
| In 1992, the Clinton administration launched a second | | | | (that is, in Kline’s view, “earnings”) will |
| federal student loan program — the Federal | | | | shrink. |
| Direct Student Loan Program — which issues | | | | The anticipated cash flows to the government on |
| federal college loans directly to borrowers through | | | | which the savings figure is based will also be much |
| the U.S. Department of Education, with no third-party | | | | more constricted if defaults are higher than |
| involvement from a bank or other FFELP lender. | | | | projected — and default rates in the Federal |
| Should the House-approved bill, known as the | | | | Direct Student Loan Program will surge, say critics. |
| Student Aid and Fiscal Responsibility Act of 2009 | | | | FFELP lenders have traditionally serviced a higher |
| (SAFRA), pass the Senate and become law, the FFEL | | | | percentage of community college and career college |
| program will be dismantled and all federal student | | | | students than the Direct Loan Program. These |
| loans will become Federal Direct loans, made directly | | | | students tend toward higher default rates on their |
| through the federal government rather than through | | | | college loans, regardless of whether they are FFELP |
| third-party FFELP lenders and banks. | | | | or Federal Direct borrowers. As the Education |
| Supporters of the legislation say that the elimination | | | | Department takes on more borrowers from |
| of FFELP subsidies will generate $87 billion in savings | | | | community and career colleges, the argument goes, |
| to taxpayers over the next decade. The bill allocates | | | | the Direct Loan Program will also be absorbing these |
| $80 billion of this estimated savings to expand the | | | | borrowers’ higher tendency to default on their |
| federal Pell Grant program for low-income college | | | | student loans, which would eat into the projected |
| students and to fund several other education | | | | $87 billion. |
| initiatives at what supporters say is no additional cost | | | | Additionally, Kline notes that the SAFRA bill only |
| to taxpayers. | | | | covers the cost of some of its proposed education |
| President Obama has been a vocal backer of the bill, | | | | spending for five years, after which taxpayers will be |
| maintaining that FFELP subsidies funnel government | | | | facing either program cuts or increased taxes in |
| money to banks and away from students. | | | | order to continue funding these new and expanded |
| “Ending this unwarranted subsidy for big banks is | | | | education initiatives. Moreover, Kline revealed in his |
| a no-brainer for folks everywhere,” Obama said | | | | piece for The Hill, the nonpartisan Congressional |
| in a recent speech at Hudson Valley Community | | | | Budget Office has recently acknowledged that the |
| College in New York. | | | | proposed Pell Grant expansion will actually cost |
| Critics: Talk of Student Loan “Savings” | | | | $11.4 billion more than originally projected — an |
| Ignores Obvious Costs | | | | amount that isn’t covered by the current |
| Critics of the SAFRA measure, however, are | | | | $80 billion allocation within the student loan bill. |