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Higher Ed Watch

A Blog from New America's Higher Education Initiative

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Sallie Mae’s Spin: It’s “Fees” We Want, Not Subsidies

Published:  February 12, 2010

When is a government subsidy for private student loan companies not a subsidy? Apparently when Sallie Mae and the rest of the student loan industry call it a “fee” instead.

Sallie Mae officials tried to make this distinction in a Wall Street Journal article on the Obama Administration’s plan to eliminate the Federal Family Education Loan (FFEL) program. Jack Remondi, the company’s chief financial officer, told the Journal that there was not “a single bit of evidence” that it was seeking to preserve the subsidy system that the president’s proposal would do away with. In fact, the company supports a switch to 100 percent direct lending and has been frantically lobbying Congress to adopt its proposal. But there is, of course, a catch. Sallie Mae’s proposal includes billions of dollars in government subsidies for private lenders layered on top of the Direct Loan program and renamed “fees.”

Since last summer, Sallie Mae and much of the student loan industry at large have been lobbying Congress to adopt their version of a direct lending program. The proposal, dubbed the Student Loan Community Proposal, would eliminate the Federal Family Education Loan (FFEL) program and move all new student loans into the Direct Loan program, just like the president’s proposal and a bill passed in the U.S. House of Representatives last summer that now awaits Senate consideration. According to the Congressional Budget Office, the House-passed bill, the Student Aid and Fiscal Responsibility Act (H.R. 3221), would generate $87 billion in savings over ten years by eliminating the FFEL program.

 

There is a key difference between the pending bill and the one supported by Sallie Mae. The Student Loan Community Proposal would allow lenders to continue originating federal student loans at individual schools and collect two new subsidies for doing so. The Congressional Budget Office estimates that these payments would cost taxpayers $13 billion over ten years, reducing the $87 billion in savings from eliminating the FFEL program by the same amount.

 

The first subsidy is a flat $75 dollar payment for every direct loan a private lender originates -- that is, when the lender makes the loan to the student with the federal government’s money. Given that some 15 million individual loans were successfully originated last year under the Department of Education’s Direct Loan program and no private lender was paid $75 for any one of those loans, one wonders what students or taxpayers will get for this extra cost. (Rumors suggest that Sallie Mae has made back-room offers to congressional staff that a lower fee would be fine too. The industry’s public relations website has not been updated, however, with this latest offer.)

 

Under the second subsidy, the government would pay private lenders an annualized interest rate of 0.69 percent for up to four months on the value of the direct loans they originate. If this part of the proposal looks like the government would be paying interest to private lenders on its own money… well, that’s exactly what it is. The U.S. Department of Education would make a loan to the lender so that it could make a direct loan to a student, but the Department of Education pays the lender interest on those funds, not the other way around. Only the most unscrupulous student loan lobbyists could come up with such a brazen scheme to bilk taxpayers. But this is, after all, the same industry that illegally collected 9.5 percent interest rates off risk-free student loans, costing taxpayers hundreds of millions of dollars.

 

If these payment arrangements under the Student Loan Community Proposal look like billions of dollars in federal subsidies to you, call Sallie Mae. We’d bet Jack Remondi would gladly educate you on the important differences between fees and subsidies.

 

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