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It's Déjà Vu All Over Again for the Student Loan Industry

Published:  December 8, 2009

In their fight against legislation that would end the Federal Family Education Loan (FFEL) program, student loan industry officials have one overriding goal: to persuade lawmakers to keep as much of the current program in place until the political winds in Washington shift back in their favor. In adopting this approach, industry officials are essentially going back to the playbook that worked so well for them in the early 1990s, the last time the FFEL program faced possible elimination.

In 1993, a new, popular Democratic president came to power and quickly made reforming the federal student loan program a top priority. Within weeks of taking office, President Bill Clinton called on Congress to eliminate the FFEL program and replace it with a new program in which the U.S. Department of Education would provide federal loans directly to students through their colleges. The plan was met with fierce resistance from the student loan industry and its allies in Congress. Eventually, the Clinton administration and Democratic Congressional leaders bowed to the pressure and agreed to phase the program in gradually.

Despite the compromise, the Direct Loan program got off to a fast start. In its first two years, direct lending captured a third of the federal student loan market. But the transition came to a grinding halt on election night 1994 when the Republicans gained control of Congress. In the years that followed, the loan industry not only survived but thrived -- as the industry's friends in Congress and the Bush administration did everything they could to tilt the playing field in FFEL's favor and essentially allowed the program to go unregulated.

Given this history, it’s hardly surprising that loan industry officials are now lobbying to keep as much of the status quo in place as possible. They believe that they just may be able to outlast their opponents once and again.

The industry's strategy is most obvious in its push to get Congress to extend the Ensuring Continued Access to Student Loans Act (ECASLA) for another year. Congress put this emergency law into place in 2008 to make sure that federal loans remained widely available in the wake of the credit crunch that overtook the financial markets last year. Under the measure, the Education Department was granted the temporary authority to purchase FFEL loans, providing lenders with federal capital they could use to make new loans. The law, which was never meant to be permanent, is set to expire this summer. Lenders say an extension is needed because the credit markets have not recovered enough to allow them to make student loans without the government’s help.

Loan industry officials who are pushing for an ECASLA extension are banking on the fact that the party occupying the White House tends to suffer big losses in mid-term elections. If that pattern holds true next fall, lenders would face a much more favorable political environment in the summer of 2011, when the proposed extension would expire, than they do now. 

Still with the White House firmly opposed to an ECASLA extension, loan industry officials, led by Sallie Mae, are pushing an alternative student loan “reform” proposal that is designed to keep as many of the current participants in the FFEL program intact as possible. Unlike President Obama’s plan, the “Student Loan Community Proposal” would allow lenders to continue to originate federal student loans and collect fees for doing so. The lenders would then sell the loans to the Education Department but maintain the right to service the loans they have made (and collect generous fees for doing so). Meanwhile, non-profit lenders would fare well in the bill. They would not only be able to continue originating federal student loans, but each and every one of them would be guaranteed a contract from the Education Department to service Direct Loans made at colleges in their home state.

The lenders’ proposal would also guarantee the survival of all existing guaranty agencies. While guarantors would no longer insure federal student loans, they would receive generous payments from the government to provide financial literacy education to students, run college outreach programs, and conduct default prevention activities. In addition, the Education Department would continue to rely on guaranty agencies to collect defaulted loans on the government's behalf.

Depite the sales pitch that lobbyists for the loan industry are offering, the Student Loan Community Proposal does not represent real reform. Instead, its main goal is to maintain a vital role for all the existing players so that the industry is well-positioned should the political tide shift back in its favor.

Tomorrow, we will take a closer look at the student loan industry's alternative proposal. Stay tuned.

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