Get Giant Lenders Off Corporate Welfare

February 27, 2010

corporate welfareBy Nicole Mayer:

Eliminate the middle man and you pay less.  Everyone knows that.  So, once and for all, it’s time to save the taxypayers some money by removing private lenders from the process of writing government backed student loans.  It’s a concept the Obama administration has embraced and is pushing to make a reality.  Consumers would be much better off if they would just hurry up.

Time to Get it Done

It was one year ago that President Obama first unveiled a proposal to have the government take control of the federal student loan industry.  The plan was to eliminate the Federal Family Education Loan Program (FFELP), in which private lenders service federal loans and rake in big bucks doing so.  A June 2009 analysis conducted by the Congressional Budget Office showed this switch could result in a savings of $87 billion in taxpayers money over the next ten years.

A Washington Post article in May 2009 noted, “for the past two decades, every attempt to overhaul the $85-billion-a-year student loan industry by eliminating subsidies to lenders has faced insurmountable opposition from one of the most powerful institutions in the business: Sallie Mae, the world’s largest student loan company.”

However, when President Obama unveiled his plan in 2009, Sallie Mae curiously didn’t come out full force against it.  In fact, Sallie Mae’s February 26, 2009, press release stated “We commend President Obama’s call to invest savings from low-cost federal funding sources to help students achieve their education goals.” Sallie Mae was “committed to delivering and servicing federal student loans regardless of the funding source.”

Get Giant Lenders Off Corporate Welfare

The plan seemed like a no-brainer.  Get giant lenders like Sallie Mae off corporate welfare and give money to students who need it.  The House of Representatives gave its approval by passing the Student Aid and Fiscal Responsibility Act of 2009 on September 17, 2009, with a vote of 253-171.

But the tides have changed. Today, the student lending bill is stuck in the Senate. It is now vulnerable to revision, weakening and delay.  Even if it survives revision, there are doubts over whether the Senate will pass the bill any time soon.  Democratic support for the bill is weaning along with the many Republicans who have already expressed opposition.  So, what happened?

What Happened?

Let’s look at the timing of this. In February 2009, Sallie Mae, the source of the heaviest student loan lobbying of all time, was engaged in a bidding war over a government contract worth hundreds of millions of dollars.  The company was at risk of losing its lifeline– the servicing of federal student loans and the fees and subsidies that come along with that job.  Is not hard to see why Sallie Mae would stand behind any proposal made by the government while its very existence was in jeopardy.

Fast forward one year later.  Sallie Mae was awarded the highly sought-after servicing contract , and now the company’s tune has changed.  Although it claims its position has not wavered, the lending giant now insists “the President’s proposal could be enhanced in a way that preserves private sector competition. . .”

Saving Money for Whom?

Then came the “research” done by the private lenders, claiming they could also save the taxpayers’ money. This statement may come as a slap in the face, making one wonder, so you could have been saving us money all along but you just didn’t bother?  The Congressional Budget Office’s response to the private lenders’ proposal, known as the “Student Loan Community Proposal” was that it would take $13 billion of the estimated $87 billion of savings and put that money right into the private lenders’ pockets.

Secretary of Education Arne Duncan recently spoke out in support of student loan reform in a Wall Street Journal Op-Ed piece.  In that article, Duncan recounts that “For far too long, bankers have gotten a free ride from the U.S. Department of Education.”  Duncan goes on to state, “Sallie Mae, the largest player in the student lending business, has spent millions of dollars to lobby Congress and run ads in several states, claiming that our proposal will cost jobs and inhibit service.  These claims must be challenged.”  Secretary Duncan points out that “Sallie Mae sent thousands of American jobs overseas in 2007 to further increase profits, and it agreed to bring them back last year only to compete for our loan-servicing business.”  The Consumer Warning Network was the first to cover this chain of events in an April 2009 piece.

The future of the Bill at issue is unknown. If you have an opinion, contact your Senators and share your opinion!