WASHINGTON — 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., 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.