When It Comes To Federal Student Loan Reform, Wall Street Analysts Suggest It's Anyone's Guess At This Point

While one investment analyst raised hopes last week that FFELP lenders might retain their origination function, another was less sanguine about the outlook for an ECASLA extension based on this story, "Education Loans Could Get Schooled", that ran in Barrons over the weekend.   

The note from Sandler O'Neill assigns a low probability on an extension of ECASLA for the following reasons:

"While we believe the longer the student loan bill gets delayed in the Senate because of the pending health-care bill, the better chance the lender community proposal has of being passed, we believe the odds of a positive outcome for the lenders is still fairly low...we believe there is little (if any) Democrat support for an Ecasla extension at this juncture, and the ranking members of the respective education committees (Rep. George Miller and Sen. Tom Harkin) have sent letters strongly urging schools to switch over to Direct Loan Program (DLP) from Ffelp as soon as possible in order to avoid problems in obtaining loans for students during the peak loan-origination season next summer...Furthermore, Sen. Harry Reid's comments Thursday that he does not plan on using budget reconciliation for the health-care bill suggests budget reconciliation (which requires a simple majority vote rather than 60 votes) would be clear to be used for the student loan bill."

The note also indicated that the timing of a student aid reform bill would likely come by February as that is when CBO would be required to rescore the proposal:

"We expect the Democrats to be motivated to pass the student loan bill before early February, when the bill would be subject to Congressional Budget Office rescoring, which would likely result in less favorable cost savings for the DLP."

Comments

[Craigie]

If the delay becomes one or two years, then the scoring advantage of DL over FFEL will increase rather than decrease. As a rule, the scoring advantage of DL over FFEL increases as interest rates rise. Right now we are mired in a historically-low, near-zero interest rate environment. Lenders are paid by Uncle Sam on a variable interest rate basis. In addition, pressure from the more student-oriented players continues to grow to move back to a variable-interest-rate for borrowers.