The Student Aid Reward Act (STAR Act) introduced in both houses of Congress March 15 provides an unusually clear test of our national priorities. Do lawmakers really want to increase aid to needy students? Or would they prefer to keep lining the pockets of the banking lobby?
At issue is the Direct Loan Program, one of two federal vehicles for student loans. As the name suggests, direct student loans are made straight out of the U.S. Treasury. Private companies bid for the contracts to handle the loans, without special fees or subsidies. By contrast, in the Federal Family Education Loan program (FFEL), banks and marketers like Sallie Mae receive subsidies from the government as incentives to make student loans, which are also guaranteed by the treasury against default.
President Bill Clinton, who introduced the direct loans in 1993, described their creation as taking “on powerful vested interests in behalf of the national interest . . . remov[ing] a government-guaranteed income from several interests who like the system as it is now.” Clinton hoped to eliminate bank loans entirely, but the Consumer Bankers Association, MBNA, and other groups fought hard and won, and the programs have coexisted ever since.
Well, over 10 years later, the numbers are in. According to President Bush’s latest education budget, loans made through FFEL in 2004 cost the federal government $12.09 on every $100. Direct loans cost just 84 cents. The STAR Act, sponsored by Democrat George Miller and Republican Tom Petri in the House and Democrat Ted Kennedy in the Senate, proposes making some of the savings available to colleges who choose direct loans, with the stipulation that the schools pass it on in the form of Pell Grants to lower-income students.
For many students from families making less than $40,000 a year, those higher grants could determine whether they get to college at all.
As it stands, banks are profiting from FFEL and then using those profits for marketing and incentives to keep schools in the fold. Only about 1,200 colleges now use direct loans, making up about 30 percent of total loan volume. According to the Congressional Budget Office, even a modest expansion in the Direct Loan Program could save up to $12 billion in the next 10 years. Many colleges would save enough to increase their Pell Grants by as much as a thousand bucks each.
FFEL is worth a lot to the nation’s powerful financial-services lobby, and those bankers won’t give it up without a fight. Since 1994, student loan volume has nearly quadrupled to $85 billion annually, and it’s still growing. Student lenders are some of the most profitable companies in the country. They pad their bottom line by trading loan portfolios and marketing private or “alternative” loans at higher interest rates. For Sallie Mae, which dominates the student loan market, profits ballooned from $384 million in 2001 to $1.3 billion last year. And every dollar it lends is still underwritten by the federal government.
That doesn’t seem quite right to Craig Munier. He is the director of the Office of Scholarships and Financial Aid at the University of Nebraska-Lincoln and a member of the National Direct Student Loan Coalition. “I’ve been in financial aid for 25 years,” he says. “As student borrowing has increased in this country, there are never any economies of scale. The federal government was paying lenders the same rates on their capital at 1980 volumes and 2000 volumes. When I buy a box of paper clips I expect to pay one price; if I’m buying a truckload of paper clips I expect a different price. When I would ask, why can’t we reduce incentives and increase grants to students, the lending companies would scream back, ‘You can’t dare touch our profits, cause we’ll stop participating.’ ”
Predictably, the student loan lobby has come back with its own study from PricewaterhouseCoopers, saying the savings for direct loans are not all that high. “We think it’s pretty close to a wash, but we don’t have the exact figures,” says Shelly Repp, general counsel for the National Council of Higher Education Loan Programs, an industry group. The study was sponsored in part by the Consumer Bankers Association, the same folks who brought you last month’s screw-the-middle-class bankruptcy bill.
“The people that are fighting this and arguing that direct lending does not save money are without exception profiting from the status quo,” says Munier. His group, on the other hand, is composed of financial-aid officers from over 100 schools who come to Washington on weekends, often at their own expense, to promote a program they believe in.
“I am not paid to do this. I do it out of my love and belief that this is a good program for students,” Munier says. “It’s a very simple issue for me. We have very little money because of the large deficits in our country. Are we gonna use the little money we have to subsidize the banking industry, or low-income students? I know how I would vote.”