Federal Student Loan Programs: On FFEL and FDL

01Aug08

This summer’s student loan crisis has renewed debate around the government’s two major loan programs: the Federal Family Education Loan, FFEL (loans via banks like Sallie Mae, but guaranteed by the government) and the Federal Direct Loan, FDL (direct loans, government to student). The old ruckus turned on the outsized profits of Sallie Mae and kickbacks it offered to schools that chose 1) FFEL, and 2) Sallie Mae.

The new ruckus comes from loan markets and HR4137, soon to be law. Dry markets frighten FFEL banks, who cannot flip loans to investors; just so, more than 100 FFEL lenders have dropped out this year. Now, HR4137 will remove all remnants of lender-college kickbacks. See where this leads?

The FFEL program always lacked the student benefits of FDL, because FDL had one source, the government, that managed loans and laws. FDL was always cheaper for taxpayers too. It seems like FFEL’s popularity sprang from the dodgy incentives passed to universities from private, profit-seeking banks. These incentives have vanished.

Recall the behemoth Sallie Mae. Under FFEL, Sallie Mae receives full federal reimbursement on each defaulted loan. Still, tenacious Sallie Mae spends millions to shadow defaulted loans through courts and collection for pure excess profit. Ideally, defaulted loans pay twice. Competing banks profit similarly, on smaller scales.

FFEL charges go on. The program encourages students to compare federal loans between banks, which certainly helps banks to sell slick private loans in their place. There’s more, but why bother.

Today, attention shifts to the Federal Direct Loan program. Some question FDL’s capacity to absorb new loan volume, despite its allegedly smaller taxpayer burden. Others claim that direct loans allow increased default. In any case, more FDL participation shifts authority from private banks to central government. With enough flight to FDL, the dynamics of student loans could change sharply.

Forget broad beliefs about markets and governments. Consider loan forgiveness.

Under the centralized FDL, policymakers can shift burdens with exhilarating efficiency. Loan forgiveness works. Any loan can be canceled or eased, in full or in part, in whichever way, as a product of federal policy. Recall the cadres of students sinking in debt, paralyzed by poor economics and risk. They have reason to soften their debts, but no obvious method

Now, FDL has tremendous upside for worried students: potential loan forgiveness for public service. The government can build an incentive apparatus to direct a post-college class of capable students, willingly, into much-needed service work. These jobs are worth more to society than their salaries pay; they also demand an educated employee who expects, post-college, to earn more. With the carrot of loan-forgiveness, these jobs pay substantially more to students and should swiftly be filled. In return, the government subsidizes these students by canceling loans. The public service work is a short-term gain, and the students’ softened debt is a long-run boon to the nation – socially, economically, even inspirationally, with whirlwind uplifting effect.

Loan forgiveness happens today at modest rates and popular programs have more applications than capacity. New legislation, in the spirit of HR4137, can expand the ease and reach of loan forgiveness. It’s a compelling chance.

A flight from FFEL into FDL is a big, inscrutable deal. FDL has advantages, but is federal control so wonderful? Is it fiscally possible? Etc.!

Still; for students, for now, it’s terrific.

Filed under: Student Loan Crisis, Student Loan Shortage   |  Leave a Comment
Tags: FDL, Federal Student Loan, FFEL, HR4137, Sallie Mae, Student Loan Crisis, Student Loan Forgiveness