Uncle Sam and Sallie Mae Need to Go Their Separate Ways

From his days on the campaign trail, President Obama has stressed the need to reform the federal guaranteed student loan system. In 2008, student lending, shaken by the credit crisis that threatened to cut off the supply of student loans from private lenders, fell dramatically. Many lenders depended on being able to sell loans they made in order to get money to make new loans, and investors’ interest in buying student loans–along with home loans and all manner of debt–significantly declined. So, to bolster the industry, the federal government stepped in as a buyer of federally guaranteed loans.

Now, with the government directly or indirectly financing virtually all federal student loans, is there any reason to continue a program that was intended to inject private capital into the education lending system?


A bill introduced in Congress in July by the chairman of the U.S. House of Representatives education committee, George Miller (D-Calif), making its way through the House Budget Committee, would end the bank-based guaranteed-student-loan program (and provide additional money for Pell Grants, expand the Perkins Loan program from the current $1-billion to $6-billion a year, while overhauling its structure).

This bill contains the essence of Obama’s reform proposal: Scrap the existing program–so that all federal loans are made directly by the government–in order to save billions of dollars in subsidy payments to lenders and make it possible to redirect money to pay for expanded grant aid to needy students. According to the Congressional Budget Office, replacing subsidized loans made by private banks with direct government lending would save between $87 and $94 billion over the next decade.

Under the bill, banks and other lenders would no longer "originate" federal student loans–there is no need for a "middle man"–but they can service them. And guarantors can compete for grants to provide borrower services like financial-literacy education, default prevention, and borrower retention.

Given the money banks and private lenders get from this cash cow, however, they aren’t walking away. Lobbying to stay in the game is unrelenting. In "Student loans: Use public funds for college students, not for banks and private lenders," I highlighted the efforts of Citibank to defeat the reform legislation.

Recently, efforts by Sallie Mae have now come to light. Sallie Mae, the nation’s largest student-loan company, spent $3.4 million on lobbying in the first half of this year in an effort to persuade lawmakers to consider alternatives to President Obama’s plan to end bank-based lending to students and replace it with direct lending, according to an analysis by the Chronicle, the Center for Responsive Politics andThe Huffington Post.

Sallie Mae is pushing a counterproposal that would allow student-loan companies to originate loans before selling them to the government. Such a great idea that Sallie Mae felt it necessary to hire several Washington-based lobbying firms, including a group led by Tony Podesta, a top Democratic fund raiser with longstanding ties to members of Congress, to push it. According to the Chronicle of Higher Education, its key hire was Jamie Gorelick, a deputy attorney general in the Clinton administration and partner in the law firm of Wilmer, Cutler, Pickering, Hale and Dorr. The firm billed Sallie Mae $270,000 for its work in the first half of 2009, according to the analysis.

Sallie Mae also showered campaign contributions on individual members of Congress, and on moderate "Blue Dog" Democrats. (The Blue Dogs have been the most vocal in their opposition to the president’s plan, warning of job losses that could result from a switch to 100-percent direct lending.)

Enough already! Blatant lobbying on behalf of private interests can not be allowed to obscure the fact that it is public money we are talking about–public money–and the need to use as much of it as possible in direct support of students. If aiding banks and private lenders has merit, and creating private jobs with public funds is defensible, let’s do it directly and transparently and with sufficient safeguards–not indirectly as a subsidy for dispensing public funds (which the government also guarantees!).

Let’s cut through all the rhetoric and do what’s right and sensible. Let’s reform the student aid program once and for all and put our dollars where the needs are–with the students. That the banks can (and will) take care of themselves is clear from the week’s headlines. (nj.com)

Leave a Reply

Be the First to Comment!

Notify of