The following is a response to a Voices piece by Nick Troiano (COL ‘11) published by the Voice on October 1, which harshly criticized the Student Aid and Fiscal Responsibility Act of 2009 [HR 3221].
Judging from his piece, Nick Troiano believes that the current program, the Federal Family Education Loan Program, embodies the free market which he holds so dear. I could not disagree more. The current program is designed to allow private banks to make loans to students by providing boatloads of incentives from the federal government. Every loan made by a bank to a student under the FFELP is insured by the full faith and credit of the United States government. In other words, the banks themselves are not responsible for the student’s ability to repay the loan; if the student defaults on the loan, the bank is repaid in full by the government. Not to mention, the banks are provided capital to make the student loans in the first place.
According to the House Committee on Education and Labor, taxpayers already provide six out of every ten dollars to banks, which are then disbursed as “private” student loans. In a nutshell, the program is welfare for bankers everywhere. The banks also earn interest on the loan, and the “servicing fees” that they collect for “administering” the loan. The Student Aid and Fiscal Responsibility Act of 2009 cuts out the banks entirely. Rather than allowing the federal government to spend tax dollars, or students and young college graduates to pay fees to banks—for the banks to mail loan statements every month—the bill allows the federal government to make loans directly to the students, eliminating needless fees.
Mr. Troiano is correct, however, in citing that the Congressional Budget Office recently revised its own estimate of savings from $80 billion over the next ten years to only $47 billion. But increasing aid programs and tying the popular Pell grant program to inflation are long-needed changes. In the last twenty years alone, annual increases in college tuition were nearly double the rate of inflation.
The numbers, though, aren’t the heart of Troiano’s argument. He contends that eliminating the FFELP would eliminate the “choice” of 19 million students. What choice was there to start with? Do I want to let Bank of America or Wells Fargo make easy money with a no-risk loan? Troiano seems to believe that this is another ‘government takeover’ of a thriving private market. What private market was there to begin with? No bank in the country would make loans to college students at any interest rate without the support of the federal government. If I were to walk into the Bank of America on Wisconsin Avenue and request a $5,000 private loan to pay my tuition, with no support from the federal government, I would be laughed onto the sidewalk.
What Troiano forgets is that the federal government has long played a vital role in higher education. The Morril Act of 1862 established what came to be known as “Land Grant Colleges.” Schools like Penn State and the University of Wisconsin were founded across the country to educate Americans primarily in agriculture and the sciences. It is hard to imagine an America today without such publicly—funded educational institutions. If the United States is to maintain its leadership role in the world, as we confront the challenges of climate change and of the current economic crisis, continued investment in education is essential.
Troiano isn’t really concerned about the deficit either. For years, the government has helped millions of Americans, including myself, by paying for the cost of attending college. The United States has enjoyed robust economic growth in the postwar era, due in part to helping millions of Americans receive a college education. According to a report published in January 2009 by the U.S. Census Bureau, college graduates make approximately $20,000 more per year than high school graduates.
Debate in any democracy is essential, but thinly veiled obstructionism is lethal to progress. I am sure that Mr. Troiano, Senator Grassley, and Sean Hannity have meaningful reservations about healthcare reform and viable solutions to the problems this country faces. When he finds them, I hope he tells all of us.
The government pays FFEL lenders “a boatload of incentives” to make loans. True or False?
False. The only “subsidy” being paid to lenders today is associated with the guarantee on loans against borrower default. Arguably, this is a borrower incentive because, as the Voice notes, a student walking into a bank and asking for an unsecured loan while having no job and income would not get a loan.
The banks are not responsible for the repayment of a student loan. True or False?
Your call. Lenders absorb 3 percent of every default. Last time we checked 3 percent was more than nothing. Also 3 percent is more than the current lender return on student loans, which is 2.09 percent (lender return is set by statute, which means that a student paying 6.8 percent on their unsubsidized Stafford is not enriching a bank, but is producing a profit for the Department of Education that it can use to fund other priorities).
The banks are provided capital with which to make loans. True or False?
Your call. Is the Voice familiar with the “Credit Crunch” that almost threw the U.S. into another depression? Well, it impacted student loans just like it did every other sector of the U.S. economy. Prior to the economic crisis, the government provided none of the capital for FFEL loans. And President Obama’s budget projects a recovery from the crisis–something that in the absence of the termination of FFEL would result in the private sector again providinng capital for all student loans.
The pending student aid reform bill assures the availability of Pell Grants and ties the maximum grant to inflation plus one percent. True or False?
False. Although President Obama originally promised to make Pell Grants an entitlement–just like Social Security–with the maximum grant set at CPI plus one percent, the House, with the approval of the President, has broken that promise. The House bill provides $40 odd billion over ten years for Pell but this is less than half of the projected cost of the program. Thus, whether or not the Pell Grant maximum rises remains subject to the annual appropriations process. Some experts suggest that if the budget deficit continues to grow (we are not aware of any economist who doesn’t believe it will over the next three years), funding for Pell is likely to be jeopardized.
It is regretable that the Voice choose to engage in something of a personal attack on Mr. Trioiano rather than study the pending legislation and issues more carefully.
Wow . . . J. Dean must not be studying anything that has anything to do with economics or finance.
First – when your loan is in deferment owing to being in school, the United States taxpayer pays the FFELP lender the interest on that loan. Hence the name “subsidized stafford loan” – look on the loan documents, it’s kinda obvious there Deano.
Secondly, the United States government (aka United States taxpayer), lends the money for the program at a rate 200 basis points under what the FFELP lender charges. Is that free market when loan funds are under priced by the government?
The total value of the subsidies by CBO overview numbers under both the Bush administration and the Obama administration was $87 billion. It would be naive to believe that simply shifting all the loan activity to the Government would realize a full savings of the subsidy. Rather, upon request of Republican Judd Gregg, the CBO recalculated a market based savings assuming full control of lending by the U.S. government and revised the number downward to $47 Billion.
Please turn off the Fox News Channel and try a little more research. Start below-
http://www.newamerica.net/blog/higher-ed-watch/2009/senator-gregg-helps-expose-student-loan-industry-falsehood-15204