Obama Budget Envisions Move to Direct Lending in 2010 (Update 3)

The description of the FY2010 budget for the Department of Education includes the following section: 

Stabilizes the Student Loan Program for Students and Saves Billions of dollars for Taxpayers.
Right now, the subsidies in the Government-guaranteed student loan program are set by the Congress through the political process. That program has not only needlessly cost taxpayers billions of dollars, but has also subjected students to uncertainty because of turmoil in the financial markets. The President’s Budget asks the Congress to end the entitlements for financial institutions that lend to students. The Administration will instead take advantage of low-cost and stable sources of capital so students are ensured access to loans, while providing high-quality services for students by using competitive, private providers to service loans. The approach in the Budget, originating all new loans in the direct lending program, saves more than $4 billion a year that is reinvested in aid to students. The Budget also makes campus-based, low-interest loans more widely available through a new modernized Perkins Loan program, overhauling the inefficient and inequitable current Perkins program.
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Look for more details on this in the weeks ahead as to how this will be implemented.  The description seems to indicate that the Department of Education would utilize several servicers (e.g., Sallie Mae which has the largest servicing platform would seem a logical choice), in addition to ACS, the current DL servicer, to manage the increase in volumes.  Current estimates are that direct lending represents roughly 30-35% of the total federal loan volume so this change would represent a three fold increase in volume over a short period of time which seems quite ambitious. 

Here is what the market thinks about how this will impact the student lenders:

SLM	4:00PM ET	5.80	2.59	30.87%	96,380,616		Chart, Messages, Key Stats, More
NNI	4:01PM ET	4.91	5.83	54.28%	3,768,955		Chart, Messages, Key Stats, More
STU	4:01PM ET	41.51	11.63	21.89%	447,754		Chart, Messages, Key Stats, More
FMD	4:01PM ET	0.98	0.10	9.26%	504,643		Chart, Messages, Key Stats, More

Update: 

• Sallie Mae press release in reaction to this announcement:

We commend President Obama's call to invest savings from low-cost federal funding sources to help students achieve their education goals. We also note that the budget proposal looks to obtain "high-quality services for students by using competitive, private providers to service loans." Sallie Mae is the largest and lowest-cost provider of student loan services, and we deliver the highest quality for students, schools and families.

In 2008, we worked closely with Congress and the Administration to ensure continued access to federal student loans at no increase in cost to taxpayers. Through our loan delivery systems and financial resources, we committed to make federal loans to every eligible student at every school in the country.

"We are proud that in this economic crisis, we provided more loans to more students than ever before, and we did it using lower-cost federal funding similar to what is being proposed today," said Al Lord, Vice Chairman and Chief Executive Officer. "We look forward to bringing these same resources to the table to help the Administration and Congress achieve their objectives."

As more details emerge in the weeks and months ahead, we will continue to work with the Administration and Congress to implement the best solution for students, schools and taxpayers. We stand ready to continue to deliver student loans that best meet families' needs. We are committed to delivering and servicing federal student loans, regardless of their funding source.

• The National Association of Student Financial Aid Administrators (NASFAA) highlighted some concerns they have with the elimination of FFELP:

"NASFAA appreciates the Obama administration's effort to make the student loan program more efficient and simpler, but we have some concerns about eliminating the Federal Family Education Loan Program (FFELP). The FFELP public/private partnership has provided millions of students with loans to attend thousands of higher education institutions across the country. Recently, the freezing credit market has created instability in the FFELP causing great anxiety for students, parents and colleges about the continued availability of student loans. Congressional efforts have shored up the FFELP in the short term, but a longer-term solution is needed. NASFAA encourages the Obama administration and Congress to carefully consider all the implications related to eliminating the FFELP. Students and parents should not be negatively impacted by losing FFELP participant-provided services like college access programs, financial literacy education and loan delinquency and default prevention. NASFAA is also concerned about the timetable of FFELP elimination. Schools should be given enough time and support to ensure their students have unhindered access to student loans."

Related articles:

• Wall Street Journal:  Direct lending program for student loans proposed; Sallie Mae shares drop (February 26, 2009)
• Press release from Department of Education Secretary Arne Duncan about 2010 budget proposals (February 26, 2009)
• New York Times:  Drilling down on the budget (February 26, 2009)
• Bloomberg:  Obama calls for end to loan subsidy for Sallie Mae (February 26, 2009)
• Reuters:  Obama swings axe at U.S. student loan programs (February 26, 2009)
• CNN Money:  Budget ends student loan payments to private lenders (February 26, 2009)
• CBA Press Release:  Students will be hurt by phase-out of student loan program (February 26, 2009)
• Washington Post:  White House plan would end subsidies to student lenders (February 26, 2009)

Related posts: 

• 24 hours later...Ten questions about Obama's Direct Lending Plan (February 27, 2009)
• SLA Webinar:  A Conversation About FFEL and Direct Lending (December 16, 2008)
• What are cohort default rates for FFELP and Direct Lending? (December 16, 2008)
• Who is new to Direct Lending? (December 15, 2008)
• Considering direct lending?  Advice from your peers (November 24, 2008)
• SLA survey finds 35.7% of FFELP respondents considering or committed to Direct Lending (October 28, 2008)
• Federal loan programs grew by 10.9% in 2007-08 (August 27, 2008)
• Number of direct lending schools rose 35.8% in past year (August 25, 2008)

About Student Lending Analytics: 
Student Lending Analytics (SLA) provides research and advisory services to find the best lenders for students. SLA manages the RFI process for colleges and universities utilizing an objective, comprehensive and analytical approach. SLA’s syndicated customer service research surveys students, financial aid administrators and independently rates lender call center operations and websites. SLA has NO affiliations with any student lenders. For additional information on Student Lending Analytics’ research and services, contact Tim Ranzetta at 650-218-8408 or tranzetta@studentlendinganalytics.com or visit www.studentlendinganalytics.com.

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Comments

[Russell Duren]

Fascinating! I work for a private university, and the majority of our students use federal aid. Thanks for all your work on this blog!

[Tobey Bullington]

Thank you so much for keeping your finger on the pulse of the financial aid industry. The information you provide is incredibly valuable, timely, and deeply appreciated!

[Henry]

Can we really trust the Obama administration? They don't have a great track record to this point. Nice ideas but we can't solve every problem at once.