Petri's Decades-Long Initiative Advances

Press Release

Next week, the House of Representatives is scheduled to consider a major student loan reform which would end the Federal Family Education Loan (FFEL) program in favor of the alternative Direct Loan program. Rep. Tom Petri (R-WI), a senior member of the House Education and Labor Committee, hails the expected passage of the change as "long overdue and very much welcome."

"I started advocating student loans made directly by the government in 1983 as an alternative to the wasteful FFEL program, and after years of explaining my approach, and years of defending direct loans from misleading attacks by the private student loan industry, we are an important step closer to settling the debate," Petri said. "Ending FFEL will save the taxpayers $87 billion over 10 years, according to the Congressional Budget Office, while providing students with even better loans through the Direct Loan Program."

Petri first became interested in student loan reform when, in the early 1980s, the head of the Wisconsin higher education agency convinced him that the FFEL program was wildly costly to the government. FFEL is a federal program which uses private capital to fund student loans but receives a federal subsidy to ensure a guaranteed rate of return. The federal government also provides a guarantee on these loans. Thus, if a student defaults, taxpayers are on the hook, not the private lender.

"The private lenders are an unnecessary profit-making level of bureaucracy within the FFEL program. With profits coming from the taxpayers, it's not private enterprise," Petri said.

Although he introduced his first direct loan proposal in 1983, getting it enacted has been a step-by-step process.

With the government making the loans, Petri determined, loans could be kept affordable by making them "income-contingent." If, after leaving college, technical or graduate school, a borrower loses a job, gets sick or has other income difficulties, the loan can be automatically rescheduled, stretching out the payments.

In 1992, Petri convinced Congress to approve a plan converting most student loans in or near default into income-contingent loans. He also won approval of a test program to make direct loans available at up to 500 schools nationwide, including Marquette University in Milwaukee.

In 1993, Petri worked with the Clinton Administration to pass legislation making direct loans widely available from the Education Department. Income-contingent repayment was offered as an option - one which has become increasingly popular over time.

The Direct Loan Program uses the proceeds from the wholesale auction of Treasury securities to the private sector to fund loans to students, and all servicing and bill collection is handled by private companies operating through performance-based contracts. The loans are delivered to students through the same system that universities use to disburse Pell Grants.

While the Direct Loan program was established as an alternative to FFEL, Petri was convinced that it would prove so successful that the older program would eventually be ended.

In fact, there has been unanimous agreement over the years about the excessive cost of the FFEL program compared to Direct Loans when studied by the Office of Management and Budget, the Congressional Budget Office, the Treasury Department, and the U.S. Government Accountability Office under Presidents Clinton and Bush. The private lenders who operate under FFEL may have come to the same conclusion and in response intensified their lobbying and political fundraising activities while comparing the two programs in ways which Petri calls "blatantly deceptive."

Schools choose between the two programs when deciding how to help students to finance their educations. The private lenders began an aggressive campaign courting college loan officials to choose FFEL. Their success enabled them to claim that the Direct Loan program was a failure.

Then a series of scandals ensued. It was found that from 2001-2006 a group of lenders illegally claimed, according to one estimate, over $1 billion in improper subsidies by knowingly manipulating a loophole in the law. And then there was the "pay for play" controversy when it was revealed that college aid administrators and Department of Education officials in charge of overseeing FFEL received special favors, benefits and kickbacks from lenders in exchange for steering students to their loans.

When the financial crisis hit in late 2008, several private lenders had difficulty raising private capital and turned to the Treasury for help. With the atmosphere radically altered, President Obama's first official budget proposal recommended eliminating FFEL and switching 100 percent to direct loans. With the Congressional Budget Office determining that the move would save $87 billion over 10 years, the case for FFEL became increasingly hard to make.

With H.R. 3221 expected to be approved by Congress and signed into law, Petri says there is one major component of his original proposal left to accomplish. Petri believes that direct loans should be repaid along with one's taxes.

"It would simplify the process," he says. "Your loan payment would be included with your tax withholding at work, and when you file your taxes, your payments would automatically be rescheduled based on your taxable income. It's sort of 'one-stop shopping.'"

Source