The Fight Has Begun | 03.27.09

Posted in FAFSA, Stafford Loan By Kristin Morris

If you haven’t heard, one of President Obama’s proposed changes for the Stafford loan program is to eliminate the FFEL program, which stands for the Federal Family Education Loan Program. This basically consists of private lenders who lend out Federal loans. Currently there are 2 types of programs that lend Federal loans, FFELP and Direct loans. Direct Loans are loans lent directly from the government. The President has proposed to eliminate the FFEL program and run all Stafford loans out of the Direct program. About $76 billion in loans has been lent out for this current school year, of which only $26 billion was lent by Direct Loans. Here is a recent article posted by the Wall Street Journal that details how politics are already playing a role in this fight between companies from the FFELP and the Direct Loan Program:

With the Obama administration proposing to cut private lenders out of the federal student-loan business, financial companies are intensifying efforts preserve their role.

Private lenders in the so-called Federal Family Education Loan Program, or FFELP, have lent more than $56 billion in the current school year. The federal government has lent about $20 billion directly. In his budget, President Obama says the government, which pays billions of dollars of subsidies to FFELP lenders, would save money by eliminating the program using private companies.

The latest skirmish in the contentious political battle erupted Thursday when the U.S. Department of Education released preliminary data comparing FFELP loan-default rates with those in the federal direct loan program.

The data indicated a 5.3% default rate in the direct lending program for the fiscal year ended Sept. 30, 2007, compared with a 7.3% default rate for FFELP, which has been the primary source of college financial aid since it was launched in the Johnson administration during the 1960s.

Industry analysts attributed the difference to the mix of schools in the two programs, with the FFELP program lending more to students from for-profit schools. They tend to have higher default rates than other student borrowers.

Private lenders and their trade groups were caught off guard by the data’s release and portrayed it as a strategic maneuver designed to advance President Obama’s plan to eliminate FFELP.

Brett Lief, president of the National Council of Higher Education Loan Programs, a trade group representing FFELP lenders and loan guarantee agencies, said he could not recall the department ever releasing preliminary default rates or separate numbers for the two programs.

“We have never seen the rates broken down,” Mr. Lief said. “It’s unfortunate that the rates are being released before there is an analysis of them,” he added. “This is very serious stuff and I’m saddened that it has come out like this.”

Some outside observers agreed that politics played a roll. Default rates “become a critical issue as folks are talking about a new model for student lending,” said Tim Ranzetta, president of Student Lending Analytics, a research concern based in Palo Alto, Calif. “I’m sure that’s probably why the department put these numbers out.”

Department of Education officials said they released the loan-default data in response to a U.S. Freedom of Information Act request from The Wall Street Journal as well as inquiries from members of Congress.

In response to the release, SLM Corp., the mammoth student lender better known as Sallie Mae, issued a study of its own Thursday. It indicates that borrowers who took out FFELP loans through Sallie Mae were 30% less likely to default on them than borrowers who used the federal direct loan program. Sallie Mae attributed the difference to default prevention programs it uses in conjunction with state loan-guarantee agencies.

Robert Shireman, a senior advisor to Secretary of Education Arne Duncan, said he had not read the Sallie Mae study and could not comment on whether it is accurate.

On Thursday, the Consumer Banking Association, a trade group that represents many FFELP lenders, sent members of Congress a petition signed by 2,500 college financial aid administrators, parents, students and others. The petition urges Congress to reject the president’s proposal to eliminate FFELP.

The president himself is being lobbied by elected officials such as James B. Lewis, New Mexico’s state treasurer. In a letter Thursday to the president, Mr. Lewis, a Democrat, praised the personal service and debt counseling offered by FFELP providers in his state and said the program’s end “would be detrimental to the success of our college-bound students and to the health of the economy, with our state experiencing the loss of over 170 jobs.”

Industry observers say the debate over FFELP’s future is likely to be long and complex. The Congressional Budget Office recently estimated that ending the program will save the government nearly $100 billion over the next decade. President Obama — whose own estimate of the savings is about half that — has said he will use the savings to increase funding for federal Pell grants for low-income students.

The potential boost for Pell will make it difficult for members of Congress on both sides of the aisle to oppose the elimination of FFELP, said Terry Hartle, a senior vice president of the American Council of Education, a trade group representing colleges.

He added, however, that many of the state guarantee agencies that help service FFELP loans have strong political support in their home states and noted that, in a recent letter to colleges, Sallie Mae suggested that additional money for Pell might be found within the federal loan system while still maintaining elements of FFELP.

“It’s certainly possible Congress would eliminate the program,” Mr. Hartle said. “But it’s equally possible – and perhaps more so – to wring more savings out of the program and put the savings into Pell.”

So what do you guys think? An important note to make is that even though the Stafford loan has two different programs right now, the loan terms do not vary. Your interest rate with Direct loans is the same as your interest rate for a Stafford loan from a private lender.  So sound off on this guys/girls…it is sure to be in the news more and more as this fight wages on.


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6 Responses to “The Fight Has Begun”

  1. Dianne says on May 1, 2009 at 3:37 pm:

    The government limits on even FFELP loans have not been enough to fund student educations. Tuitions, student housing, food, and books have risen to outrageous levels. So students have had to borrow even more in alternative loans, which have less federal oversight. FFELP loans have allowed flexibility and choice that is not possible with Direct Lending. Unfortunately, a few bad actors in the FFELP program brought the industry down and this valuable resource has a very real possibility of being eliminated. I’ve worked both at a public college in Financial Aid and am currently working in a lender-neutral company, assisting schools in their loan processing. I’ve been in
    Financial aid for ten years now. Reforms are needed, but not elimination of FFELP.

    Reply To This Comment
  2. Lee Anne Hannula says on April 2, 2009 at 11:32 am:

    @everyone…if you are in support of keeping the FFEL program you can sign the petition here http://www.cbanet.org/Applications/Forms/FormDisplay.cfm?FormID=8619

    Reply To This Comment
  3. collegebound says on April 2, 2009 at 10:18 am:

    I agree with you collegemom. I have paid mightly into the SYSTEM with MY taxes. When do we the middleincome familes get a break. I am sick of funding everyone’s home, now cars and their education. If you can not afford college then those students should work on campus (check out Blackburn College). I’ll take a loan and pay it if Obama can find ME a jog when I graduate. He is giving the country away!!!!!!!!!!!

    Reply To This Comment
  4. collegemom says on March 30, 2009 at 7:59 am:

    you kids don’t have a clue – the last thing citizens want is more government restrictions. This means you have less choices in how to fund your college education. This could mean the difference in you going to your private school of choice and having to attend the so-so community college near your house.

    Reply To This Comment
  5. Juana says on March 28, 2009 at 10:01 am:

    I honestly feel that during the campaign Obama stated a lot that he was going to do and now that hes in office, tables are turning as smoothly as they possibly could. We voted him into office while coming close to him losing against McCain. Us low-class Americans need as much money as we possibly can afford to win on these sites so we can better our future and advance our education just about the same way a high class American can. i just wish they didn’t come about to this conclusion and disappear the only help we can get. unfortunately they don’t care for our education BUT that’s not an obstacle. we can succeed through anything so how about it.

    Reply To This Comment
  6. jones says on March 27, 2009 at 3:35 pm:

    President Obama rocks

    Reply To This Comment

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