Though regulatory reform has stolen center stage on Capitol Hill, the Obama administration remains intent on wiping out the Federal Family Education Loan Program (FFELP), and its demise appears to be just a matter of time.
The House passed legislation last year to end the program, which lets lenders offer student loans at low rates through partial government guarantees, and the Senate plans to follow suit soon. Though it has been stalled by the lingering debate over health-care reform, the measure enjoys strong Democratic support, in part because dismantling FFELP is projected to save the government $87 billion over 10 years.
On Wednesday, Education Secretary Arne Duncan ratcheted up his calls for ending the program, arguing banks have benefited long enough.
"The banking industry has had a free ride from taxpayers for too long," he said in a conference call with reporters. "They have had their bailouts. They have had their subsidies, and they've paid themselves very well while working families and students are struggling to make ends meet."
Duncan said taxpayers paid up to $8 billion a year to subsidize student loans.
"Essentially, we give the banks our money, and they lend it back out to students with interest, and if the students can't pay, we pick up the tab," he said.
Political analysts said the cost-savings potential is too attractive for Congress to let pass by.
"The administration has repeatedly called for eliminating the FFELP and using the savings to boost educational spending," said Jaret Seiberg, an analyst with Washington Research Group, a division of Concept Capital. "Given the success Democrats have had in curbing the private sector's involvement in student lending in order to fund politically popular education initiatives, one has to believe the president is going to succeed in this latest effort."
Lenders, including the Student Loan Marketing Association, or Sallie Mae, are pushing an alternative to ending FFELP that they hope will gain some momentum on Capitol Hill. The plan, the Student Loan Community Proposal, would let lenders continue to originate and service student loans, but sell them to the government, eliminating the need for costly credit subsidies.
Sen. Robert Casey, a Pennsylvania Democrat whose state is home to thousands of Sallie Mae employees, has shown the most interest in the lenders' idea but has not committed. He requested the Congressional Budget Office study the alternative last year.
"The short answer is I don't know yet where I'll come down on that question," he said during a call with reporters Wednesday. "We want to make sure that as we examine both the impact on student lending, and the availability of lending for young people to go to college, we also need to assess, in states like Pennsylvania, the potential job impact. And those are among the considerations I'm weighing right now, but I have not made a decision yet."
Still, observers said it is unlikely the idea will gain traction. The administration's plan would create larger savings, and Duncan shot down the alternative on Wednesday. It "would replace subsidies with fees on taxpayers, and the lenders' plan would cost taxpayers $13 billion more over 10 years and by definition cover many fewer students," Duncan said. "Americans want to invest in their children and their future, and not in profit for banks."
Congress has already succeeded in making inroads at unraveling banks' participation in the federal student loan marketplace. The government guarantee and other benefits for FFELP lenders were significantly slashed through reforms in 2007 that made such loans much less profitable.
The new law prompted several lenders to pull back or pull out of the market, including Bank of America, KeyCorp and U.S. Bancorp. Scott Talbott, a senior vice president for the Financial Services Roundtable, whose members include most of the largest student lenders said that the 2007 reforms have already had a big impact.
"Since the 2007 reforms, which decreased the program's profitability, about a third of our members have stopped offering federal student loans, and another third have greatly reduced it," he said. "For the rest that decided to stick in the business, it's a marketing tool more than anything."
Since 2007, 183 student lenders have exited or suspended their participation in all or part of the FFELP program, according to FinAid.org. Of those, 117 lenders have suspended all participation with FFELP while the other 66 have suspended just consolidation loans.
Even before President Obama took office, abolishing FFELP was a big priority for the late Senate Health Education Labor and Pensions Committee Chairman Edward Kennedy. His successor, Sen. Tom Harkin, D-Iowa, has said he remains just as committed to the cause but has waited for the Senate to take up a budget reconciliation measure since such measures only need a simple majority of 51 votes to pass.
But with reconciliation still viewed as a possible vehicle for moving the stalled health-care reform legislation, efforts to reform student lending have been held up. Analysts and lobbyists on both sides of the issue said the legislation's outlook remains dependant on what happens with health-care reform.
"This should have been done months ago, but it has been held hostage to the health-care debate," Seiberg said.
Jason Delisle, the director of the Federal Education Budget Project at the New America Foundation, said the administration's position will ultimately prevail. "If it were a free-standing bill moving through reconciliation, I would say it would be a done deal," he said.
While legislation to end FFELP remains in limbo, another battle is brewing for lenders that are still offering student loans. Based on assumptions that legislation to end FFELP would already be enacted, a temporary measure passed in 2008 that lets the Education Department buy student loans from lenders on the secondary market is due to expire July 1.
With many colleges and universities still offering student loans through banks and other lenders rather than government direct loans, lenders argue the program, known as Ensuring Continued Access to Student Loans Act, should be extended at least another year.
The Department of Education's budget for the 2008 to 2009 year and its projections for the 2009-10 year said that the liquidity program was covering about 57% of FFELP loans, or about $112 billion.