From the New America Foundation's Higher Ed Watch blog:
House Committee Embraces New America's Loan Auction Proposal The House Education and Labor Committee has embraced the New America Foundation’s proposal to use an auction mechanism to set student loan subsidies. The Committee unanimously adopted an amendment to the College Cost Reduction Act of 2007 proposed by Representative Tom Petri (R-WI) that would test loan auctions in the government-guaranteed loan program.
Student loan auctions are a way to set subsidy levels competitively, by having lenders compete for the right to make loans in the FFEL program. Right now, for example, the law guarantees 97 to 100% reimbursement rates for loan defaults. If there was an auction, maybe there'd be a lender who'd say, "I only need 50% reimbursement to make a profit." Presto: big subsidy cut.
Auctions are sort of a moderating proposal favored by the New America Foundation, among others concerned with college access. Others, like presidential candidate John Edwards (and Billl Clinton, back in the day) say we should throw out the lenders altogether and go 100% to the government-administered Direct Lending program, which is much cheaper for taxpayers.
As a journalist who doesn't have to sit in the room for higher ed bill markups, I feel like the second approach is just cleaner and more appealing. The FFEL program is a semi-monopoly anyway. If you institute an auction or some other kind of forced "competition", what's to stop Sallie Mae and the other big lenders from simply colluding to keep the subsidies high? They have the market share to force out any upstart (read, MyRichUncle) who wants to demonstrate that loans can be done cheaper.
I feel like the burden is on the lenders to show that they can actually add value by competing on price and offering better service. And they can do that just fine on the other side of the line: the private loan market.
What?! Ok, this needs a new post.