WASHINGTON D.C., June 26, 2007—America’s Student Loan Providers hosted a Media Round-Table on Tuesday, June 26 to discuss why we believe the proposed budget cuts and auction programs before Congress would harm borrowers. Student loan executives and other stakeholders from around the country explained the practical and very dramatic consequences of these cuts on the individuals they serve—students and parents.
Student loan executives and stakeholders offered the following remarks at the round table:
Remarks by Kevin Bruns
Executive Director, America’s Student Loan Providers
Good afternoon and welcome to the America’s Student Loan Provider’s media round-table. For more than 40 years federal guaranteed student loans have helped millions of American families achieve the kinds of dreams made possible by the best higher education system in the world.
The truth is the private sector-based federal student loan program – one of President Johnson’s original Great Society proposals -- has been a remarkable success. Since 1965, it has helped 50 million Americans go to college. It has helped triple the percentage of college graduates in this country.
This year, it serves 6 million students at 5,000 schools, or roughly speaking, 8 out of 10 students and 8 out of 10 schools. And because loan providers compete with each other on price, not to mention service, the typical borrower can save thousands of dollars. In other words, guaranteed loans make college more affordable for millions of families. In fact, they are the lowest cost student loans available anywhere.
By making college more affordable, the lender-based Federal Family Education Loan Program is helping millions of families that are struggling to pay the ever increasing costs of college. Loan providers also encourage smart borrowing, discourage excessive debt and counsel borrowers on ways to avoid default, all of which saves taxpayers billions of dollars. These efforts help explain why the FFELP’s default rates are lower than the Direct Loan program’s.
Before Congress today are massive proposed budget cuts and policy changes.
We’ll spend the next hour discussing the very real and significant impact that these proposed budget cuts would have on students and parents. No matter how you camouflage it, an $18.3 billion budget cut—on top of last year’s $18 billion cut—is deep and would make student loans more expensive, and therefore college less affordable, for millions of families already struggling to pay for college.
Finally, both bills would impose an unworkable, untried auction system on parent borrowers and schools. The lowest bid would trump service reliability and quality every time, leaving borrowers and schools to pick up the pieces. Auction proposals have been studied in the past and found wanting. Its supporters offer no evidence--academic, empirical or analytical--why these proposals are any different.
The two committees of jurisdiction have now acted – approving packages that we clearly think are misguided and potentially very harmful. The packages will soon come before the full House and Senate. Our message to members of Congress who will now be considering these bills on the floor: First, do no harm, second, listen to your constituents.
Remarks by Joe Belew
President, Consumer Bankers Association
Good afternoon. My name is Joe Belew. I am president of the Consumer Bankers Association, whose members are the leading retail banks in the United States.
In addition to offering savings and investment products, community development lending, auto, small business and home equity loans, we make most of the bank-originated student loans in the Federal Family Education Loan program.
I will try to make my comments brief and to the point.
For 45 years, our banks have been committed to helping students and families meet the escalating costs of college. We are proud of our role. And we are very concerned and alarmed about the well-being of those students going forward if congress makes severe cuts to the program.
Because of the historic competition in the lending business, students win. We have record low default rates. We have created an extremely high level of program quality and service quality. And lenders are absorbing some of the costs of borrowing on behalf of students because of competition.
Let me emphasize the threat to these borrower benefits. Almost all lenders now pay the origination fees for borrowers. Other discounts encourage on-time payment, which is good for both borrower and lender. Most lenders have absorbed some of the interest cost on plus loans to compete with the direct loan program and with each-other. It is almost inevitable that these borrower benefits will disappear if the program is slashed.
We support more student aid, across the board. Pell grants have not kept pace, and FFELP loan limits have not kept pace, with the real issue here, the cost of college. But ironically, major cuts to FFELP lenders could actually raise the borrowing costs for most students who don’t get Pell grants – the middle class.
At the same time, students who get Pell grants often have to take out student loans as well. If they lose borrower benefits, they may get modestly more grant money but may see their borrowing costs rise – money will come in one pocket and go out the other.
Program quality is a real issue. As I said, we are proud of the quality of our delivery. The federal direct loan program doesn’t provide the same level of service as the FFELP program.
Quality is much more than having a pleasant voice on the other end of the phone. It is responsiveness. It is 24 hour, 7 days a week access. It is technology to cut down the hassle factor. It is on-time disbursement of checks to pay tuition.
It would be a terrible mistake to cripple a successful private-public partnership that has worked well for 45 years. We compare very favorably to a bureaucratic federal government program that has had major breakdowns, even as its volume has dropped.
One last point: the auction of plus loans proposed by Congress would have negative effects on students and families, if we believe in borrower choice. After all the emphasis this year on making sure students and parents can use the lender of their choice, the auction would limit parents’ choice to two lenders only in each state.
It will leave small lenders out and probably result in a direct loan-only plus program, the first step to forcing all schools into the direct loan program. In a program that is already complicated, this will add a new layer of complication and confusion, with no benefit to students at all.
In sum, competition in the private sector has led to top-level service and discounts for borrowers. That will be eliminated under the House and Senate bills. Congress needs to think through the implications of many unintended consequences before going ahead with these deep cuts.
Remarks by David Hartung
Senior Vice President, DBRS
My name is David Hartung and I am a Senior Vice President at DBRS, an international rating agency headquartered in Toronto, Canada. We also have offices in five countries in North America and Europe. We are privately owned, independent of any financial institution or other outside group.
DBRS is a full service rating agency covering a wide variety of financial institutions, corporate entities, sovereigns and structured finance products. We are one of five Nationally Recognized Statistical Rating Organizations in the U.S. and recently received recognition as an External Credit Assessment Institution by the European Union.
With regard to the student loan industry, our role is to assign ratings to asset-backed securitization transactions backed by pools of student loans. Our ratings reflect the credit quality of the particular classes of bonds contained in the transactions. These assessments take into consideration: 1) the form, or structure, of the transaction; 2) various characteristics of the loan pool being financed; and 3) other factors and risks associated with the loan pool and transaction structure, such as loan prepayments, interest rate risk, interest basis risk, and loan servicing risk.
With regard to the proposed changes to the FFEL program, our objective opinion is that any increases in loan origination fees, cuts in interest subsidies, and reduction in federal loan insurance would have the effect of reducing the positive economics of loan securitizations and make the process of structuring transactions to achieve top ratings, or ratings similar to what have been achieved in the past, more difficult.
By "more difficult", I mean that squeezing the spread in these transactions, issuers may have to reach deeper into their pockets to put up higher levels of credit enhancement while paying potentially higher debt service. In our observations, the combination of these factors drives down the margin that lenders often rely on to fund borrower benefits and maintain high levels of service.
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America’s Student Loan Providers represents 87 of the nation’s leading private, nonprofit and state-based education and financial organizations that provide guaranteed student loans through the Federal Family Education Loan Program. By leveraging private financial markets and competing for the right to lend to students, ASLP members offer low-cost loans to millions of students and superior levels of service to most of the approximately 5,000 postsecondary institutions that participate in FFELP. More information is available at <http://www.aslp.us/> www.aslp.us or call 202.721.1190.