Proposed FFELP Cuts Would Be Severe, New Analysis Says
Senate Must Act to Temper Cuts, ASLP Urges

WASHINGTON, D.C., July 18, 2007—“The die has yet to be cast—the potential catastrophic impact of the proposed $18 billion cuts in student loans can be averted,” Kevin Bruns, executive director of America’s Student Loan Providers, said in response to independent analysis released today by Mark Kantrowitz, Publisher of FinAid.org.  The study examines proposed cuts to the Federal Family Education Loan Program (FFELP).
 
“This new independent analysis speaks for itself,” Kevin Bruns said.  “Kantrowitz’s examination exposes the irrationality of making severe cuts in lender payments when margins are already thin and much rides on FFELP’s continued operation as a source of low-cost college loans.”
 
The new analysis (http://www.finaid.org/educators/2007subsidycuts.txt) is largely consistent with a recent report by the Congressional Research Service, concluding that Sallie Mae’s after-tax margin was less than a half a cent on the dollar (excerpt below).  The erroneous, unproven perception that lenders earn “excessive” or “massive” profits has been cited as grounds for the proposed $18-20 billion cuts now before Congress. 
 
“The message to Congress and families nationwide is clear,” Bruns continued.  “The die has yet to be cast—the potential catastrophic impact of the proposed $18 billion cuts in student loans can be averted.  The truth about the severity of the cuts ought now govern Congress’s next steps—support the bipartisan Nelson-Burr amendment. 
 
“The Nelson-Burr Amendment bridges the desires of those who, on the one hand, support an increase in need-based aid for low-income families and, on the other hand, want to avoid increasing loan costs for families and doing irreparable, significant harm to FFELP.”
 
The Nelson-Burr amendment does not eliminate major cuts to for-profit lenders – it reduces them to a level that would permit lenders to continue to offer borrowers some level of price discounts and high quality service. It seeks to preserve a strong private sector-based loan program that offers students and parents the choice of private lenders that compete to offer federal student loans. The amendment allows for a much-needed Pell Grant increase that would make college more affordable.
 
Highlights of FinAid.Org Analysis
 
Bp= basis points
http://www.finaid.org/educators/2007subsidycuts.txt
 
[P]pending legislation involves cuts to more than just SAP. It also involves decreases in the lender insurance percentage and increases in the lender-paid origination fees. This message analyzes the combined impact of these subsidy cuts…
 
***
 
Focusing on the impact on exceptional performers, which represent approximately 80% of all education lenders, the President's Budget and the Senate would cut the insurance percentage by 2% and the House by 4%. This yields the following impact on yield from the cuts in insurance percentage:
 
Impact of Risk Sharing on Yield:
   [a] President's Budget: 2.72 bp to 1.79 bp
   [b] House:                    5.44 bp to 3.58 bp
   [c] Senate:                   2.72 bp to 1.79 bp
 
***
 
This yields the following impact on yield from the increases in lender-paid origination fees:
 
   Impact of Lender-Paid Origination Fees:
   [a] President's Budget: 10.03 bp to 5.24 bp
   [b] House:                     7.02 bp to 3.67 bp
   [c] Senate:                   10.03 bp to 5.24 bp
 
***
 
Assuming 4% PLUS loan volume and 96% Stafford/Consolidation loan volume, the weighted average of the SAP cuts are as follows:
 
   Impact of the SAP cuts:
   [a] President's Budget: 50.00 bp
   [b] House:                    56.20 bp
   [c] Senate:                   51.20 bp
 
Combining the impact of the risk sharing and lender-paid origination fees with the SAP cuts yields the following total impact on yield:
 
   Total Impact of Subsidy Cuts on Yield:
   [a] President's Budget: 62.75 bp to 57.03 bp
   [b] House:                     68.66 bp to 63.45 bp
   [c] Senate:                    63.95 bp to 58.23 bp
 
   Percentage Cut in Profits After Subsidy Cuts:
   [a] President's Budget: 87% to 79%
   [b] House:                     99% to 90%
   [c] Senate:                    89% to 81%
 
Since these cuts represent a 81% to 99% cut in Sallie Mae profits from the loans, it is highly likely that most of Sallie Mae's profit from newly originated loans after the subsidy cuts will derive from servicing the loans and collecting defaulted loans, along with revenue from private student loans.
 
The proposed subsidy cuts, especially those passed by the House, represent a severe cut in profits for education lenders. The cuts are severe enough that they may leave many smaller lenders unprofitable.  The cuts are severe enough that industry-wide profit levels may fall significantly below comparable benchmarks for consumer finance companies. This may be contrary to Congress's intent to focus public dollars on students while still allowing education lenders to retain a reasonable level of profit. If that were not Congress's intent, it would be simpler for Congress to repeal the FFELP program.
 
Accordingly, Congress may wish to consider scaling back the subsidy cuts to just the 50 bp SAP cut, eliminating the proposed reduction in insurance percentage and increase in lender-paid origination fees.**
 
Highlights of CRS Report
 
Table:
 
7.43  average coupon rate" paid by students
-5.25  payment to investors
2.18  excess spread
 
2.18  excess spread
-0.70  origination costs, servicing costs, and "borrower benefits"
-0.75  "average" of lender origination fees and consolidation offset fees for Sallie Mae
 portfolio
-0.27  income taxes (goes to the government)
-0.45  Sallie Mae profit
0.000  (rounding error) 

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America’s Student Loan Providers represents 89 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 (FFEL) 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 the FFEL program. More information is available at www.aslp.us or call 202.721.1190.