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Kevin Bruns: A regrettable proposal for student loans

Consumer choice would be replaced by a government monopoly.

By KEVIN BRUNS

Last update: November 1, 2009 - 7:25 PM

Health care isn't the only system on the verge of being overhauled. Federal student loans, which six out of 10 families rely on to pay for college, could soon see their most dramatic changes since 1965. Given the stakes, it would be wise for policymakers to heed some of lessons found right here on these pages.

Since February, the Star Tribune's "Streamlining Minnesota" series has examined ways to achieve a more efficient public sector. Its blend of ambitious goals, idealism and pragmatism could teach national policymakers a thing or two.

A plan is now before Congress to eliminate the Federal Family Education Loan (FFEL) Program, which serves 90 percent of Minnesota schools. Replacing it would be the Federal Direct Loan Program, which come July 1 would be the only federal student loan program.

It's truly unfortunate that the proposed Student Aid and Fiscal Responsibility Act hasn't been subjected to the kind of evidence-based analysis advocated by "Streamlining Minnesota." Had it been, a strong case would have been made for preserving a program model based on consumer choice and borrower service.

Take two principles advanced in an article from March:

First, focus on results, not dollars. "The bottom line of government isn't dollars," Public Strategies Group cofounder Babak Armajani said. "It's results per dollar."

Yet it's exactly the dollars that have most influenced the thinking on the FFEL elimination proposal. Too many have been unduly swayed by the government's claims of gargantuan (read unrealistic) cost savings from eliminating the program.

No attempt has been made to compare the FFEL program's quality of services, incentives for innovation, customer satisfaction and, in particular, default aversion results with those of the Direct Loan program. Had the comparison been made, it would have come out that an overwhelming majority of postsecondary institutions -- including schools like Minnesota State, Mankato; Carleton; Wisconsin, and Notre Dame -- has always preferred FFEL, largely because of superior service, choice of lenders and default prevention efforts.

Second, provide service recipients with choices, Armajani advised. Consumer choice is the hallmark of FFEL -- schools have enjoyed choice of loan programs since 1993, and families have enjoyed choice of lenders since 1965.

There's no debating that the loss of student and school choice will have consequences -- the move from a consumer choice model to a government monopoly model is a 180-degree turn. There will be implications for quality of service, innovation and default rates. And with the loss of FFEL's nationwide network of default prevention specialists, more borrowers will likely default.

Finally, "Streamlining Minnesota" is all about "working smarter." The administration's bold plan falls short in that regard.

The job is enormous. The Direct Loan program would have to quadruple in size overnight. It would be responsible for originating 17 million new loans annually for 10 million students who attend 6,000 schools. It would soon be managing half a trillion dollars in loans -- and would become one of the world's largest banks.

The risks for families are very real. Look across the pond to the United Kingdom's experiment with a single student lender -- delays and a system meltdown have left 146,000 students without funds. Look closer to home at the performance of the new GI education-benefits program. Of the quarter of a million applications filed, just 27,000 veterans have received their benefits.

Finally, in the midst of a severe recession, the bill would force 4,000 schools to spend time and money to switch programs and eliminate thousands of good-paying jobs.

There's got to be a smarter way to reform student loans, and there is. An alternative, the Student-Loan Community Proposal, builds upon the administration's plan while avoiding its downsides. It keeps students and schools in the driver's seat by preserving choice. It avoids the risks of a major meltdown, and 117 schools in the state, as well as more than 4,000 elsewhere, won't have to undertake a conversion that for many will be disruptive and costly. Thousands of jobs will be saved, too.

Frankly, it's the kind of smart government that "Streamlining Minnesota" is all about.

Kevin Bruns, formerly of Edina, is executive director of the Washington, D.C.-based America's Student Loan Providers, an organization of lenders and guaranty agencies that make federally guaranteed student loans.

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