President Barack Obama’s budget proposes to restructure the federal student loan program by making the Department of Education the sole lender to students using low-cost U.S. Treasury funds. The income earned from this lending would then be used to fund other education programs. From the start, Sallie Mae has said, “We agree.”
[IMGCAP(1)]So we’re perplexed by the administration’s recent rhetoric on this issue, particularly in light of Obama’s calls for bipartisan collaboration. Simply put, we have been advocates for change and collaboration. Surely it would be more productive to work together to find a solution that best serves taxpayers, students, parents and schools?
The truth is that Sallie Mae and many members of the student loan community are advocating for reform as the president has proposed. We have suggested enhancements to the president’s proposal that would make the program better for students and schools, preserve thousands of much-needed jobs and, we believe, be ultimately less expensive for taxpayers. The Congressional Budget Office determined that this alternative leads to a net $83 billion in savings that can be used for Pell Grant increases, community college funding, deficit reduction and other education priorities.
Contrary to the recent comments by Education Secretary Arne Duncan and House Education and Labor Chairman George Miller (D-Calif.), Sallie Mae is not advocating for the old, Congressionally designed student loan program. Instead, we propose enhancements to the president’s proposal that take advantage of what the government and the private sector do best and add risk sharing in loan servicing to better align the main servicer and taxpayer objective: helping customers repay their loans.
As with the president’s proposal, low-cost Treasury funds would be used to finance new student loans. The U.S. Treasury is the largest, lowest-cost borrower, thus taking advantage of this scale and cost to save money makes sense. Although some imply the “savings” in the president’s proposal are derived from ending lender subsidies, the savings come from the net interest income the federal government would earn by charging students rates of 6.8 percent, and by borrowing money at 2 percent or less. In effect, the proposal would turn the Department of Education into one of the world’s largest banks.
Unlike the president’s proposal where the Education Department would rely on a single, no-bid private-sector contractor to process student loan applications, the community proposal calls for open competition. If unhappy with services provided, customers could move their business to another provider, including the Education Department’s delivery system. The president’s proposal calls for a single service provider, selected by the federal government, and eliminates school and student choice regardless of the quality of service.
For 16 years, a government-selected contractor has provided loan origination services, yet only 25 percent of schools and students elected that provider. Clearly, after 16 years of experience, schools and students have chosen the superior service provider, the private sector.
The alternative proposal includes an innovative arrangement that requires the loan originator/servicer to share in the risk of loan default. The mortgage crisis showed firsthand how the lack of economic exposure in a mortgage loan led to poor credit decisions, overborrowing and catastrophic levels of defaults. Have we really learned so little that we would set ourselves up to repeat this error in the student loan program?
Sallie Mae knows how to help customers through economic bumps in the road. When we make contact with customers, we successfully keep them out of default more than 90 percent of the time. The risk-sharing concept we advocate would produce lower defaults by encouraging servicers to exceed the Education Department’s prescribed collection steps and counsel customers how to better manage their loans. This extra effort would save tens of thousands of borrowers from the devastating and lasting consequences of default and billions of taxpayer dollars. With the Department of Education forecast that more than $1.5 trillion in new student loans will be made in the next 10 years, a lower default rate from strong competition and risk-sharing would save tens of billions of taxpayer dollars.
To date, the Senate has held no hearings about how best to make this dramatic change to student loan programs. Senate Health, Education, Labor and Pensions Chairman Tom Harkin (D-Iowa) continues to state that his committee will propose legislation that mirrors the legislation the House has passed, despite vocal concerns about the resulting job loss from moderate Democratic Senators. A reform of this magnitude deserves a comprehensive review. Sallie Mae’s efforts in Congress are simply to ask that job saving, disruption preventing, choice and competition preserving alternatives be given a fair hearing. The benefits of the enhancements outlined above are real, as is our strong desire not to put 2,300 Sallie Mae jobs needlessly at risk.
The president recently expressed a desire to explore bipartisan solutions. To pass his student loan proposal, the Senate would have to rely on the hyperpartisan budget reconciliation procedure. Yet the alternative proposal achieves nearly all of the desired savings (even before the $10 billion in additional savings from lower defaults) and could be passed with broad, bipartisan support. With a fair hearing, a better student loan program could be created for students, their families, schools and taxpayers. This is something we should all be able to get behind.
Jack Remondi is vice chairman and chief financial officer of Sallie Mae.