While it is true that shutting down FFELP will appear to save around $4 billion dollars in taxpayer money, what this article doesn’t tell you is that the budget for Direct Lending will have to be increased in order to meet demand for student lending. Right now Direct Lending has around 40 percent of the student loan share. Which means in order to meet the demand, Direct Lending will have to ask for more money from the Federal Government’s budget, since Direct Lending does not raise capital from private lending. All this means effectively we the tax payers of this country will have a higher tax burden and a government run student loan industry.CNN wrote: Obama budget calls for major US student loan shiftWASHINGTON (Reuters) - The private-sector student loan industry would be dealt a major blow under the federal 2010 budget proposed by President Barack Obama Thursday.
Shares in Sallie Mae, the nation's largest student loan group, fell sharply on Obama's proposal to shift all federal student loans into the so-called direct-loan program administered by the U.S. Department of Education.
The budget for fiscal 2010, which begins on Oct. 1, said it would save more than $4 billion annually by ending "entitlements" for financial institutions that lend to students.
"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 budget document said.
The change, subject to review by Congress, could spell the end of the Federal Family Education Loan Program, a source of revenues for years for many student loan groups.
"President Obama proposes that, beginning in 2010-2011, all new student loans would be originated through the direct student loan program," said California Democratic Rep. George Miller, chairman of the House education committee, in a statement praising the president's proposal.
Shares in Sallie Mae, known formally as SLM Corp, were down $3.29 or 39 percent at $5.10 each in midday New York Stock Exchange trading after dipping as low as $4.72 earlier. (Reporting by Kevin Drawbaugh, editing by Gerald E. McCormick)
What this article is also not telling you (the taxpayer) is how much money will also need to be raised through the Federal Government’s budget to increase their capability to process, originate and service this new loan volume. So again, more money that the taxpayer will have to shell out.
Currently, the billions of dollars used in the FFEL program to subsidized student (Stafford) loans by 2 basis points on millions of loans. With this money eliminated from FFEL it will have to be used to subsidized 100 percent the student (Ford) loans that the Direct Lending originates, this will not be an effective way to use our money. That is right, Direct Lending’s business model is to leverage their relationship with the Federal Government to subsidize 100 percent of all loan volume that they originate. So you the tax payer are going from subsidizing student loans at 2 percent to 100 percent.
We have seen this type of thing back in 2007 with a Democrat controlled Congress. The Congress moved billions of dollars out of the FFEL program and put it into the Pell Grant program. I said back then that this was a bad idea because Pell Grants do not have to be paid back. So instead of subsidizing student (Stafford) loans at 2 percent, they just gave away the money at 100%. So again, I believe that Democrats only know one thing, throw/give money away.
I think we only need to look at the USPS as an example to show us that when the Federal Government acquires a monopoly on certain services that the American people are not better served. They keep raising the prices of stamps and services and are now talking about cutting back on delivery days (hours of operations). Further more they use their relationship with Federal government to retain a monopoly in letter delivery services, force out competition and tap the government for subsidizes.
It should also be pointed out that the Department of Education that administrates Direct Lending does not service their own portfolio and RFPs it out to private (usually FFELP) servicers, like they will run out of the Student Lending industry with this measure.
This is just the Obama Administration picking up the gauntlet of the Clinton Administration (who created Direct Lending) in order to move more political capital towards the federal government (a classic example of Socialism) and away from private markets. Guys if this goes through, I will not be there to defend any of you, when they move to take over your job/industry.
