House Lawmakers Evaluate Proposals To Revise Student Lending
May 21 2009 - 2:29PM
Dow Jones News
U.S. House lawmakers are assessing proposals to revamp the
federally backed student-loan market, a move that could lead to
private lenders being cut out of the marketplace.
A House Education and Labor Committee hearing held Thursday
focused on possible changes to the student loan market, where one
major option proposed by the Obama administration is for the U.S.
Education Department to become the main provider of student
loans.
"Students shouldn't have to worry whether the roller coaster
fluctuations of the financial markets will hurt their college
opportunities," said Rep. George Miller, D-Calif., the chairman of
the committee.
The proposal to reduce private participation in the student loan
market was a major component of President Barack Obama's budget
request. According to the nonpartisan Congressional Budget Office,
the policy change could save taxpayers $94 billion over the next
decade. That money would then be reinvested in federal grants for
lower-income students to help offset the cost of going to
college.
However, opponents of the plan are contesting the legitimacy of
the savings amount. Ohio University economics professor Richard
Vedder, testifying before the panel, said the CBO estimate did not
take into account additional administrative costs.
When pressed by Rep. Robert Andrews, D-N.J., on whether he was
sure his statement was correct, Vedder responded in a brief gripe,
"I'm not sure what I said is right; neither are you."
Vedder said lawmakers should look at ways to reduce the cost of
education by addressing the admission fees charged by
institutions.
Among others who testified before the committee were Bob
Shireman, deputy undersecretary at the Department of Education and
Obama's point man in leading the push on student lending changes,
along with Jack Remondi, chief financial officer for the nation's
largest student lender, SLM Corp. (SLM), known as Sallie Mae.
Remondi outlined a plan drafted by Sallie Mae that he said
enhances the ideas proposed by the Obama administration. Remondi
said Sallie Mae supports Obama's goal and is not trying to preserve
lender subsidies, which are paid to lenders by the government for
supplying loans to students. Under Obama's plan, those subsidies
would be shifted from lenders and used to increase federal
grants.
Nonetheless, Sallie Mae's plan includes allowing lenders to
continue supplying loans if they meet Education Department
criteria, and to allow schools to choose its loan-delivery system,
among other solutions proposed.
On the other hand, Shireman highlighted components of Obama's
plan that would leverage competition among private firms by
providing lenders that do a better job of handling default
prevention and customer satisfaction with an increased share of the
federal student-loan portfolio to service. "Conversely, those firms
that are less adept will have a smaller share of that portfolio to
service over time," he said.
While the loans would still be provided directly by the
government, the rates paid to lenders for handling collection
services would be similar to existing rates, Shireman said after
the hearing.
Other concerns raised at the hearing dealt with the cost of
implementing Obama's plan, which is referred to as direct loans.
Opponents say transitional and additional administrative costs for
colleges are likely to lead to delay of loan disbursements, along
with other unforeseen issues.
However, Anna Griswold, executive director of Pennsylvania State
University's Office of Student Aid, said her university incurred
hardly any costs when it implemented its Federal Direct Loan
Program in March 2008.
"We did not hire additional staff to covert to direct lending
and the cost to convert was within normal budgetary costs required
for any adjustments that schools make when regulations change,"
Griswold said in testimony before the committee.
Still, Republican lawmakers on the panel expressed concern that
implementation of Obama's plan would push private lenders out of
the equation, tilting market competitiveness in favor of public
entities.
"Instead of trying to keep private capital and innovation out of
student lending permanently, perhaps we should be looking for ways
to bring it back," said Rep. Howard McKeon, the California
Republican who is also a ranking member on the panel, alluding to
the current credit crisis.
-By Darrell A. Hughes, Dow Jones Newswires; 202-862-6684;
darrell.hughes@dowjones.com
(Corey Boles contributed to this report.)