The Department of Education recently announced modifications to its lender of last resort program as part of its effort to prepare for the possibility of federal student loan shortages as a result of the credit crunch. The net result is a contraption Rube Goldberg would be proud of -- what in effect are direct student loans that are more difficult to administer and more costly for taxpayers than the regular Direct Loan program.
The lender of last resort (LLR) program is designed to ensure all students have access to Federal Family Education Loans (FFEL) by requiring that guaranty agencies provide loans to students that have been turned down by conventional lenders. Though it is important to guarantee access to student loans, the similarities (and costly differences) to the regular Direct Loan program make LLR a significantly inferior option. In fact, Washington appears to be trying to avoid the more obvious and efficient solution -- boosting the regular Direct Loan program.
Here are five similarities between the new but hardly improved LLR program and the regular Direct Loan program:
* Federal Guarantee: While the government reimburses lenders for 97 percent of a FFEL loan that goes into default, it is on the hook for 100 percent of an LLR loan. Since Direct Loans are obligations from the U.S. Treasury, they effectively have a 100 percent guarantee.
* Funding Source: The Secretary of Education is permitted to advance U.S. Treasury funds to guaranty agencies for the purposes of making LLR loans. The Department disburses Direct Loans using Treasury funds.
* Terms and Conditions: According to the Department of Education, borrowers who take out an LLR loan will have "the same rights, benefits, and obligations" as those who receive FFEL loans. Federal law also requires that Direct Loans have the same terms and conditions as those offered through FFEL.
* School-wide Eligibility: Currently, student loan applicants become eligible for a LLR loan only after they have been turned down by two FFEL lenders (only one in some states). However, under the recently signed Ensuring Continued Access to Student Loans Act of 2008, the Education Secretary will be able to designate whole institutions as eligible for LLR loans. Schools using Direct Loans also receive institution-wide eligibility.
* Loan Ownership: Similar to Direct Loans, LLR loans made with advanced Treasury funds are assets of the U.S. government.
So let's get this straight. Under the LLR program, loans would be made with Treasury funds and have the same terms and conditions as FFEL loans. They would carry a 100 percent guarantee, and could be granted on an institution-wide basis.
But the LLR program isn't a carbon copy of the regular Direct Loan program. In fact, the Department has added provisions that make the program more complicated and costly to taxpayers, such as:
* Requiring Additional Federal Payments: With the regular Direct Loan program, the government's initial expenditure is equal to the principal of the loan. But under LLR, the Department would provide a fee to a guaranty agency for "originating and servicing LLR loans made with advances." The government would thus provide money to make the loan and then give the guaranty agency MORE money to agree to originate a loan with ZERO default risk.
* Designating the Debt as FFEL Loans: As we noted earlier, borrowers have nearly the same terms under the two federal student loan programs, with at least one notable difference: Direct Loans can be partially forgiven for public service. Under the Department's LLR plans, however, the guaranty agency must assign to the Secretary any loans made with federal advances that she requests. These assigned assets will still be considered FFEL loans, meaning a borrower could end up with a loan owned by the government with inferior terms to other Department-held loans.
To read more, please visit www.HigherEdWatch.org