WASHINGTON-President Obama is looking to shut down the Federal Family Education Loan program and replace it with direct federal aid-a move that could hurt banks and CUs that participate in the $80-billion federal student loan market.
"To make it economically feasible for a lender to issue federal student loans in which the government caps the interest rate, the government paid subsidizes to lenders to make those loans," explained Mike Weber, VP-marketing for Credit Union Student Choice, a CUSO that works in the private student lending market.
While a number of CUs that participate in the FFEL program are simply referral lenders or only have a few federal loans on the books, USC CU is one of the few that relies on them as a core business. "We've been doing student lending since 1998. It would have a significant impact," said VP-student services Michael Kim.
The $346-million CU does more than $100 million in annual federal student loans, the most of any CU in the country. USC and a select few other CUs would be the hardest hit if the program is shut down, but Kim is also concerned about the effects on students. "We've seen a lot of changes over the last couple of years with the reduction in yields and increases in fees, and now to be faced with the elimination of the program altogether, we think it would be a disservice to students," he said. "Strictly from a student perspective it's not going to make any difference. It's not going to save students money; the program from the student's prospective would be identical."
Though the program would be identical on the students' side, Kim questioned the government's ability to be as flexible and efficient as the current system. He also raised doubts that eliminating subsidies would save taxpayer money, as the government would now have to fully fund $80 billion worth of loans on an annual basis instead of splitting the cost evenly.
Obama's support of direct federal aid was out in the open in the campaign, but the move to change the program in the 2010 budget caught USC CU by surprise, as it was not considered to be a high priority given the financial crisis sweeping the globe. But the shock did not keep the 35-year-old institution off-balance for long as it and a few other CUs are already working to get their voices heard on Capitol Hill. "We have started some communication with CUNA and our leagues to get involved in the lobbying efforts," said Kim. "We're looking at options on how to address this and demonstrate the value of the FFEL program."
"This is going to take some time to work through the system to see if it eliminates the federal program as it is right now," Weber added, noting the budget as it stands is an early proposal. "We still feel very confident that there is an opportunity for private student lending. Long term there is still plenty of opportunity because the cost of attendance continues to increase. [Students] are going to have to find places to fill that financing gap after they've exhausted scholarships, grants and federal student loans."
About $15 to $20 million worth of student loans come exclusively from the private sector and are used primarily by students who could not fully cover the cost of tuition with other assistance or are in families that do not qualify for federal loans. Weber believes that the marketplace continues to need good lenders that charge interest rates that are fair to both sides-credit unions fit that description perfectly, he noted. Despite the recession, tuition at nearly every institution continues to increase and with home equity dissolving and unemployment increasing, private sector educational loans could very well be in higher demand in the near future.
"It's hard to imagine a $20-billion a year market drying up any time soon," said Weber.
