November 14, 2003

Student Loan Program Threatened

As a member of the old Education and Labor Committee, and now as Vice Chairman of the Committee on Education and the Workforce, I have long fought for a system of student loans which would always be affordable because the rate of repayment would vary according to the post-school income of the borrower. Working with the Clinton administration, I managed to get significant portions of my proposal enacted into law, currently as part of the Direct Student Loan program.

Competition between the resulting Direct Student Loan (DSL) program and the older program now known as the Federal Family Education Loan (FFEL) program, has led to lower interest rates for all student loan borrowers. Unfortunately, however, that competition helps to explain the current threat to the DSL program.

The FFEL underwrites private loans to students while the Direct Loan program lends to students through the U.S. Treasury. FFEL is a great deal for the private lenders who typically receive a $12.80 subsidy for every $100 of loans that they make. In contrast, the federal government makes a profit of 22 cents for every $100 loaned through DSL.

The private lenders like their subsidy and fear a fully functioning direct loan system, which is why for two decades they have fought my student loan proposals. Although I have managed to shepherd the DSL program into being, the determined opposition of private lenders has prevented my full proposal from being tried.

By accepting lower rates, blocking a full DSL program and other techniques, the private lenders have managed to hang onto 70 percent of the student loan market while DSLs have the remaining 30 percent.

In late October, the U.S. News and World Report magazine discussed one of those "other techniques" in its cover story, "Big Money on Campus." The article reveals the questionable practices of FFEL lenders who offer financial inducements to schools that switch their business from the DSL program to the private lenders. Schools typically offer loans only under a single program rather than both and, the magazine says, 62 colleges have been induced to switch to the FFEL program since 2000 - a development that is costing the taxpayers $250 million a year.

For years I have argued that subsidies under the FFEL program, intended to ensure private lenders participate in the program, are excessive and wasteful. It seems now that these generous subsidies are helping to support lenders' efforts to undercut the DSL program and increase their loan portfolios - and their federal subsidies.

Since its inception in 1993, the DSL program - even in its abbreviated form - has been a far more efficient method of offering low-interest loans to college students, but the reported actions of private lenders, if unchecked, threaten the program's existence. Students and taxpayers both cannot afford to lose this low-cost alternative to the FFEL program.

I've been telling that to my colleagues in Congress, but they also need to hear from parents, students, teachers and college administrators to combat the influence of the subsidized private lenders.