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President Barack Obamas budget proposes to restructure the federal student loan program by making the Department of Education the sole lender to students using low-cost U.S. Treasury funds. The income earned from this lending would then be used to fund other education programs. From the start, Sallie Mae has said, We agree.
So were perplexed by the administrations recent rhetoric on this issue, particularly in light of Obamas calls for bipartisan collaboration. Simply put, we have been advocates for change and collaboration. Surely it would be more productive to work together to find a solution that best serves taxpayers, students, parents and schools?
The truth is that Sallie Mae and many members of the student loan community are advocating for reform as the president has proposed. We have suggested enhancements to the presidents proposal that would make the program better for students and schools, preserve thousands of much-needed jobs and, we believe, be ultimately less expensive for taxpayers. The Congressional Budget Office determined that this alternative leads to a net $83 billion in savings that can be used for Pell Grant increases, community college funding, deficit reduction and other education priorities.
Contrary to the recent comments by Education Secretary Arne Duncan and House Education and Labor Chairman George Miller (D-Calif.), Sallie Mae is not advocating for the old, Congressionally designed student loan program. Instead, we propose enhancements to the presidents proposal that take advantage of what the government and the private sector do best and add risk sharing in loan servicing to better align the main servicer and taxpayer objective: helping customers repay their loans.
As with the presidents proposal, low-cost Treasury funds would be used to finance new student loans. The U.S. Treasury is the largest, lowest-cost borrower, thus taking advantage of this scale and cost to save money makes sense. Although some imply the savings in the presidents proposal are derived from ending lender subsidies, the savings come from the net interest income the federal government would earn by charging students rates of 6.8 percent, and by borrowing money at 2 percent or less. In effect, the proposal would turn the Department of Education into one of the worlds largest banks.
Unlike the presidents proposal where the Education Department would rely on a single, no-bid private-sector contractor to process student loan applications, the community proposal calls for open competition. If unhappy with services provided, customers could move their business to another provider, including the Education Departments delivery system. The presidents proposal calls for a single service provider, selected by the federal government, and eliminates school and student choice regardless of the quality of service.
For 16 years, a government-selected contractor has provided loan origination services, yet only 25 percent of schools and students elected that provider. Clearly, after 16 years of experience, schools and students have chosen the superior service provider, the private sector.