Private Lenders Brace for Fight Over Student-Loan Role

With the Obama administration proposing to cut private lenders out of the federal student-loan business, financial companies are intensifying efforts preserve their role.

Private lenders in the so-called Federal Family Education Loan Program, or FFELP, have lent more than $56 billion in the current school year. The federal government has lent about $20 billion directly. In his budget, President Obama says the government, which pays billions of dollars of subsidies to FFELP lenders, would save money by eliminating the program using private companies.

The latest skirmish in the contentious political battle erupted Thursday when the U.S. Department of Education released preliminary data comparing FFELP loan-default rates with those in the federal direct loan program.

The data indicated a 5.3% default rate in the direct lending program for the fiscal year ended Sept. 30, 2007, compared with a 7.3% default rate for FFELP, which has been the primary source of college financial aid since it was launched in the Johnson administration during the 1960s.

Industry analysts attributed the difference to the mix of schools in the two programs, with the FFELP program lending more to students from for-profit schools. They tend to have higher default rates than other student borrowers.

Private lenders and their trade groups were caught off guard by the data’s release and portrayed it as a strategic maneuver designed to advance President Obama’s plan to eliminate FFELP.

Brett Lief, president of the National Council of Higher Education Loan Programs, a trade group representing FFELP lenders and loan guarantee agencies, said he could not recall the department ever releasing preliminary default rates or separate numbers for the two programs.

"We have never seen the rates broken down," Mr. Lief said. "It’s unfortunate that the rates are being released before there is an analysis of them," he added. "This is very serious stuff and I’m saddened that it has come out like this."

Some outside observers agreed that politics played a roll. Default rates "become a critical issue as folks are talking about a new model for student lending," said Tim Ranzetta, president of Student Lending Analytics, a research concern based in Palo Alto, Calif. "I’m sure that’s probably why the department put these numbers out."

Department of Education officials said they released the loan-default data in response to a U.S. Freedom of Information Act request from The Wall Street Journal as well as inquiries from members of Congress.

In response to the release, SLM Corp., the mammoth student lender better known as Sallie Mae, issued a study of its own Thursday. It indicates that borrowers who took out FFELP loans through Sallie Mae were 30% less likely to default on them than borrowers who used the federal direct loan program. Sallie Mae attributed the difference to default prevention programs it uses in conjunction with state loan-guarantee agencies.

Robert Shireman, a senior advisor to Secretary of Education Arne Duncan, said he had not read the Sallie Mae study and could not comment on whether it is accurate.

On Thursday, the Consumer Bankers Association, a trade group that represents many FFELP lenders, sent members of Congress a petition signed by 2,500 college financial aid administrators, parents, students and others. The petition urges Congress to reject the president’s proposal to eliminate FFELP.

The president himself is being lobbied by elected officials such as James B. Lewis, New Mexico’s state treasurer. In a letter Thursday to the president, Mr. Lewis, a Democrat, praised the personal service and debt counseling offered by FFELP providers in his state and said the program’s end "would be detrimental to the success of our college-bound students and to the health of the economy, with our state experiencing the loss of over 170 jobs."

Industry observers say the debate over FFELP’s future is likely to be long and complex. The Congressional Budget Office recently estimated that ending the program will save the government nearly $100 billion over the next decade. President Obama — whose own estimate of the savings is about half that — has said he will use the savings to increase funding for federal Pell grants for low-income students.

The potential boost for Pell will make it difficult for members of Congress on both sides of the aisle to oppose the elimination of FFELP, said Terry Hartle, a senior vice president of the American Council of Education, a trade group representing colleges.

He added, however, that many of the state guarantee agencies that help service FFELP loans have strong political support in their home states and noted that, in a recent letter to colleges, Sallie Mae suggested that additional money for Pell might be found within the federal loan system while still maintaining elements of FFELP.

"It’s certainly possible Congress would eliminate the program," Mr. Hartle said. "But it’s equally possible – and perhaps more so – to wring more savings out of the program and put the savings into Pell."  (Wall Street Journal)

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