America’s Students, Families and Taxpayers Need Major College Loan Reforms, Witnesses Tell House Education Committee
WASHINGTON, D.C. – A wide and growing consensus of stakeholders, including the Obama administration, Sallie Mae, colleges and students, agree that major reforms must be made to the federal student loan programs in order to make college more affordable for years to come, witnesses told the House Education and Labor Committee today.
In the last year, the crises in the credit markets and the economy have dramatically altered the student loan landscape, putting the federally-guaranteed student loan program that private lenders participate in on life support. As a result, the student loan programs aren’t working as effectively as they could be for students, families or taxpayers, witnesses explained.
“The status quo has become impossible to defend. Students and families are not being served as well as they could be and taxpayers are spending billions of dollars annually to finance a broken system,” said U.S. Rep. George Miller (D-CA), the chairman of the committee. “Momentum is building for reforms that will deliver aid to families in a more stable and sustainable way, shielded from any ups and downs in the markets. We can either continue sending billions of dollars to banks and lenders or we can start sending it to students who need more help than ever paying for college in this economy.”The U.S. Department of Education currently operates two programs that provide borrowers with the same federal student loans, and with the same interest rates, terms and conditions.
One is the federally guaranteed student loan program – or FFELP – under which private companies make loans to students and receive federal subsidies. These loans are virtually risk-free for lenders because they get reimbursed by taxpayers when borrowers default on their loans. The other is the Direct Loan program, under which the federal government offers loans directly to students using Treasury capital. It’s the cheaper of the two for taxpayers.
Last year, as the credit markets froze, many lenders had trouble financing their lending activity, putting the loans that millions of students and families were depending on in jeopardy.
To ensure that no eligible student or parent was denied a loan, Congress enacted the Ensuring Continued Access to Student Loans Act. This temporary program allowed the Education Secretary to purchase student loans made by FFELP lenders, but only in a manner that resulted in no additional costs to taxpayers and only if lenders used this capital to continue making new loans to students. The program is set to expire in 2010.
President Obama’s FY 2010 budget proposes increasing the Pell Grant scholarship and other forms of college aid for low- and middle-income students by almost $100 billion over ten years, at no new cost to taxpayers. His plan would be paid for by originating all new federal student loans through the Direct Loan program starting in 2010. According to preliminary estimates by the Congressional Budget Office, this would save $94 billion over the next decade.
“Reliable access to student loans is important not just for our students and their families, but also for our entire economy,” said Robert M. Shireman, the U.S. Deputy Under Secretary of Education. “We have seen the guaranteed Federal student loan system, known as the Federal Family Education Loan (FFEL) Program, come close to collapse this past year. Instead of maintaining this elaborate web of programs designed to prop up the FFEL program, we should originate 100% of new loans through the less costly Direct Loan program.”
Jack Remondi, the Vice Chairman and Chief Financial Officer of Sallie Mae, agreed that whatever policy is pursued, vast changes are needed to stabilize the student loan programs. “Sallie Mae fully supports the Administration’s objectives of assuring stable funding of the federal student loan program while generating tens of billions of dollars in taxpayer savings that can be used to increase need-based grant aid for students, specifically to put the Pell Grant program on stable footing,” he said.
Contrary to claims from critics, it would be fairly easy and inexpensive for colleges and universities that participate in FFELP to switch to Direct Loans, partly because schools would be able use the same on-site system currently used to administer Pell Grant scholarships.
Pennsylvania State University, formerly a FFELP school, switched to Direct Loans last March to protect its 38,000 students’ access to loans amidst the credit crunch.
“Direct Loans offered a logical alternative to the FFEL Program in light of our circumstances,” said Anna M. Griswold, the university’s Assistant Vice President for Undergraduate Education. “It is testimony to the streamlined nature of the direct loan process and the single point of contact model it represents, that we were able to convert fairly quickly. With adequate lead time, even most of the smaller schools will likely find converting to Direct Loans a manageable process.”
She added that Penn State did not have to hire extra staff, or increase its budget resources, during this switch and that Direct Loans offered better loan repayment and loan forgiveness options for students.
Campuses in the California State University System have found it easier for schools to administer, simpler for students and parents, and faster at originating and disbursing loans than FFELP, reported Charles B. Reed, the Chancellor of the system.
“Stability and reliability in a campus’s student loan program is tremendously important to our students and institutions,” he said. “Given this situation, coupled with the ready availability of a proven alternative in Direct Lending, beginning last year I strongly encouraged all of our remaining FFEL campuses to make the switch to Direct Lending.”
The Obama proposal would also maintain a role for the private sector by allowing companies to compete for contracts to service these loans. This competitive bidding process would result in the best customer service for borrowers by harnessing the private sector’s most innovative and consumer-friendly practices.
Miller said the committee will continue to closely examine proposals to determine the best policy for students, families and taxpayers.
To view all of the testimonies from today’s hearing, click here.
For more information on President Obama’s proposal, click here. ###
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