WASHINGTON After nearly three years of reforms that reduced private lenders' role in government-guaranteed student lending, a House panel is expected to pass a bill today that would effectively eliminate their role.
The House Committee on Education and Labor is scheduled to vote on the bill, which would shut commercial lenders out of the Federal Family Education Loan Program. The move was originally called for by the Obama administration's budget and gained momentum after the Congressional Budget Office said it would save $87 billion over the next 10 years. Some of the savings could be used to expand other funding sources, such as direct loans from the government and Pell Grants for students.
"The $87 billion in budget savings that would be created by the elimination of the FFELP is too tempting for Democrats to turn down," said Jaret Seiberg, an analyst with Washington Research Group, a division of Concept Capital. "We expect Congress to eliminate the FFELP program."
The bill may leave some wiggle room for private lenders as it continues to wind its way through Congress. The House bill includes a provision that would continue to allow nonprofit lenders to service loans in a way similar to the setup of FFELP. If the provision survives, industry representatives said that may give for-profit lenders an opening to argue to the Senate that student lending would be more efficient and more transparent if banks were allowed to compete with the nonprofits.
"In essence it's a no-bid contract given to an entity that may not be as efficient as someone like Citigroup, nor the highest-quality provider," said John Dean, special counsel to the Consumer Bankers Association. "Some groups are pushing back on that set-aside."
Dean said the industry would argue that lack of competition could lead to scandals such as the faltering of the Connecticut Student Loan Foundation earlier this year after it ran out of money to service its student loans and was found to have spent thousands of dollars on parties and bonuses for its executives. He said that legislation entirely eliminating banks' participation in student lending was not a done deal.
"There's some leverage, but it's political leverage it's not a matter of the banks having to come up with additional concessions," he said.
"If the final legislation ends up creating an opportunity other than as a direct loan servicer, it will be because Congress decided to support choice."
But the FFELP itself faces a formidable opponent in the Senate: Sen. Ted Kennedy, D-Mass., who has long voiced a preference for direct lending from the government over lender involvement through the FFELP.
Consumer advocates also support eliminating FFELP and shifting support to Pell Grants.
Chris Lindstrom, higher education program director for U.S. Public Interest Research Group, said the bill was "a historic investment in the Pell Grant" and "a fundamental attempt to address the problem" of rising education costs for low-income students.
On the other side of the debate, favoring the nonprofit carve-out, is Sen. Kent Conrad, D-S.D., the chairman of the Senate Budget Committee.
During talks on the budget for the 2010 fiscal year, Conrad discussed the possibility of allowing state and nonprofit lenders to continue to participate in student lending.
Dean said for-profit student lenders plan to use Conrad's support for nonprofit and state lenders as a springboard to promote their proposal, which would have student lenders originate loans and then quickly sell them to the Department of Education while continuing to service them.
The House bill already contains one provision friendly to lenders: It would allow them to collect federal subsidies on the FFELP loans they have made since the beginning of 2000 using the London interbank offered rate, rather than a derivative of the federal funds rate, to calculate the interest rate.
Since the spread between the Libor and the federal funds rate began to widen drastically with the onset of the credit crunch, lenders, many of which obtain Libor-based funding, were making less and less money from the student loans they held. The change would apply to loans made up to July 1, 2010.
