NASFAA News alerted me to the release of the CBO report on H.R. 3221 (or SAFRA) which passed the House Committee on Education and Finance last week and may hit the House floor as early as this week. First, I thought it would be useful to account for the savings and costs of the bill to see how it all adds up:
| 2009-19 | |
| Estimated Savings | Impact |
| Shifting Loans from FFEL to DL | $ 86.8 |
| Estimated Outlays | |
| Student Loans | |
| Cut interest rates on subsidized loans | $ 3.20 |
| Interactive and Other Changes | |
| Interactions of Bill | $ 7.60 |
| Ability to refinance consolidation loans | $ (0.25) |
| Exclude assets in eligibility calculations | $ 0.12 |
| Drug convicted to receive student aid | $ 0.02 |
| Loan forgiveness for uniformed services | $ 0.02 |
| Change in index to LIBOR from CP | Neglible |
| New Perkins Loan Program | $ 1.30 |
| TOTAL Student Loans | $ 12.02 |
| Federal Pell Grant Program | $ 39.40 |
| Other Mandatory Spending Programs | |
| Early Learning Challenge Fund | $ 7.90 |
| Reform of Community Colleges | $ 6.10 |
| Renovation/Modernization of Comm. Colleges | $ 2.50 |
| Renovation/Modernization of K-12 | $ 4.10 |
| College Access and Completion Innovation Fund | $ 3.00 |
| HBCU and Minority Servicing Institutions Grants | $ 2.20 |
| Supplemental Education Grants for Veterans | $ 1.90 |
| Total Other Mandatory Spending Programs | $ 27.70 |
| Total Estimated Outlays | $ 79.12 |
| Net of Estimated Savings Less Outlays | $ 7.69 |
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On a percentage basis, here are how the various categories of spending stack up against the savings figures:
| Percent | |
| Program | of Savings |
| Pell Grants | 45% |
| Other Mandatory Spend. | 32% |
| Student Loans | 14% |
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Here are some other interesting points made in the CBO estimate:
- Describes the methodology for calculating savings through elimination of FFEL as 10-20% lower subsidy rate for direct loans (bold print is mine):
Eliminate new lending in the FFEL Program. Under current law, the federal government
provides federal loans to borrowers through two separate programs. In the FFEL Program
(guaranteed loans), private lenders originate loans to postsecondary students and the
federal government makes payments to these lenders, guarantees them against significant
loss in the case of default, and provides funds to guaranty agencies to help administer
those loans. In the direct loan program, the federal government serves as the lender.
Beginning in July 2010, the bill would prohibit new guaranteed loans under the FFEL
Program; which under current law, CBO estimates will account for about $705 billion in
loans—70 percent of all loan volume—over the next 10 years. Under the prohibition in
the bill, CBO expects that volume would shift to the direct loan program. CBO estimates
that the subsidy rates for direct loans are, on average, about 10 to 20 percentage points lower than for guaranteed loans. (The subsidy rate reflects the present value cost for each
dollar the government loans or guarantees.) Because of that difference in subsidy rates,
CBO estimates that prohibiting new guaranteed loans—with the replacement of those
loans by direct student loans—would lower federal budget costs by $41.8 billion over
2010-2014 period and by $86.8 billion over the 2010-2019 period. Consistent with the
accounting required under FCRA, most of those estimated savings represent the changes
in present-value estimates for the switch from guarantees to direct loans for each year
over that period.
provides federal loans to borrowers through two separate programs. In the FFEL Program
(guaranteed loans), private lenders originate loans to postsecondary students and the
federal government makes payments to these lenders, guarantees them against significant
loss in the case of default, and provides funds to guaranty agencies to help administer
those loans. In the direct loan program, the federal government serves as the lender.
Beginning in July 2010, the bill would prohibit new guaranteed loans under the FFEL
Program; which under current law, CBO estimates will account for about $705 billion in
loans—70 percent of all loan volume—over the next 10 years. Under the prohibition in
the bill, CBO expects that volume would shift to the direct loan program. CBO estimates
that the subsidy rates for direct loans are, on average, about 10 to 20 percentage points lower than for guaranteed loans. (The subsidy rate reflects the present value cost for each
dollar the government loans or guarantees.) Because of that difference in subsidy rates,
CBO estimates that prohibiting new guaranteed loans—with the replacement of those
loans by direct student loans—would lower federal budget costs by $41.8 billion over
2010-2014 period and by $86.8 billion over the 2010-2019 period. Consistent with the
accounting required under FCRA, most of those estimated savings represent the changes
in present-value estimates for the switch from guarantees to direct loans for each year
over that period.
- As for administrative costs of the two programs, the CBO report seems to indicate that administrative costs would be the same in both programs, about $7 billion over the 2010-19 period:
- FFEL Program: About $7 billion of the projected savings over the 2010-2019 period reflect forgone administrative costs in the FFEL Program. The increased loan volume in the direct loan program would require additional funds for administering and servicing those loans, but those costs are classified as discretionary spending and discussed below under the heading “Spending Subject to Appropriation.”
- Direct Loan program: "Administration of Direct Loans. As mentioned above, most of the costs for administering loans in the FFEL Program are mandatory, while administrative costs in the direct loan program are mostly discretionary. Based on information about contracts for administering the FFEL program and consistent with projected loan volume, CBO estimates that eliminating new lending in the FFEL program and shifting the projected volume to the direct loan program would increase discretionary spending for administrative costs by $7.2 billion over the 2010-2019 period.
- As for the community college initiative, which would provide $7.0 billion for community college reform and $2.5 billion for renovation and modernization...I thought was ambitious at the time until I read this about the California budget crisis and its impact on community colleges in Diverse Issues in Higher Education:
"The 100-campus
community college system and other school districts will see further
funding cuts of $5.7 billion. This would be in addition to the $8
billion in cuts for schools and community colleges proposed earlier
this year."
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Other items that I wonder about:
- How long before critics point out the fact that spending $24 million to allow students convicted of illegal drug possession while receiving financial aid to receive student aid exceeds the $21 million set aside to forgive federal loans for members of uniformed services who didn't receive academic credit because they had to withdraw from school due to military service?
- There is a sentiment from some in the financial aid industry that more savings should be targeted to the middle class by lowering the current rates on the unsubsidized Stafford and PLUS loan rates. Here was a recent response from an SLA Flash Survey on FFEL and Direct Lending:
"The interest rates should go down permanently. The origination fee should disappear. Once profit is not determining national policy, we should be able to offer loans that actually tell the student "we want to help you go to school" (ie: 2% interest...both sub in repayment and unsub). ...Students need to know that a very low interest loan is available to help them attain their goals for the future and that every effort will be made to keep the loan affordable."
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