Thursday, March 09, 2006

To the Lobbyists

Here is part of an email I sent to a student loan industry lobbyist yesterday. He had contacted me seeking to give me the industry's side of the story on guaranteed vs. direct loans. I haven't heard back from him quite yet.

My impression of the lending industry's arguments are as follows:
1) With cash-basis accounting, the budgetary advantages of the direct loan program seem to disappear. While nevertheless reestimating a subsidy of $9.20 per $100 for FFELP and $1.70 per $100 for FDLP, the GAO has acknowledged that judging the true costs of each program is difficult. Lenders also argue that these budget estimates don't account for tax revenues recouped from the private businesses involved in the industry.

2) Many schools have left the direct loan program for FFELP over the last 10 years. Incentives provided by FFELP can make loans cheaper for students. Competition between the two types of industries makes for a better program.

3) The banks do a better job of administering and servicing loans than the federal government.


My responses are as follows:
1) "Cash basis accounting is inappropriate for financial institutions making long-term commitments." ("Student Loans: A Budget Primer", Center on Federal Financial Institutions, 11/8/05) I have yet to find a source, not in the direct employ of the student loan industry, which claims that FFELP costs the government less than direct lending.

2) The direct loan program is restricted by law from offering the same incentives as FFELP. While these incentives have influenced schools to switch, and they do make loans cheaper for students, federal legislation could reverse these conditions with a stroke of the pen.

3) I agree. I have it on good authority that the student loan program is professionally and efficiently administered by the professionals in private industry, and those who have come from private industry to the FSA. The creation of the FSA was an attempt to bring these best practices into the federal government, and I believe that FDLP can do just as well with political will behind it.

No comments: