The Obama administration continued its work to create bold change yesterday when it released its 2010 fiscal year budget blueprint. The blueprint proposes making the Pell Grant program a mandatory spending program that automatically increases with the Consumer Price Index plus 1 percent and eliminating the Federal Family Education Loan Program (FFELP) in 2010.
Important Reminder:
The changes recommended by the Obama administration are not certain. The president's budget provides a blueprint for Congress. Congress will ultimately decide what is included in the final FY 2010 budget. NASFAA will continue to work with lawmakers to help shape a spending bill that benefits students and families.
Despite the lack of certainty about what will ultimately be included in the final FY 2010 budget, President Obama's budget gave many in higher education reasons to celebrate, but also re-instigated the sometimes unpleasant FFELP vs. Direct Loan debate.
NASFAA thanked President Obama for his continued commitment to making student financial aid a national funding priority.
"I commend President Obama for proposing bold steps to make college access, affordability, and success a top priority in the coming years," NASFAA President and CEO Dr. Philip Day said in a press release. "For years the Pell Grant award has remained relatively flat while the cost of everything else, including a college education, has increased. President Obama's proposal to tie the Pell Grant award to the CPI plus 1 percent is a significant victory for low-income students struggling to pay for college."
Day also expressed support for efforts to improve the student loan program, but also had some concerns about eliminating the FFELP.
"Recently, the freezing credit market has created instability in the FFELP causing great anxiety for students, parents and colleges about the continued availability of student loans," Day said. Congressional efforts have shored up the FFELP in the short term, but a longer-term solution is needed. NASFAA encourages the Obama administration and Congress to carefully consider all the implications related to eliminating the FFELP. Students and parents should not be negatively impacted by losing FFELP participant-provided services like college access programs, financial literacy education and loan delinquency and default prevention."
Overall, Obama's budget would provide significant increases in student aid, including:
Federal Pell Grants
The budget proposal supports a $5,550 Pell Grant maximum award in the 2010-2011 school year. The Administration will index Pell grants to the Consumer Price Index plus 1 percent, in order to account for inflation in this sector. In addition, the Administration proposes to make the Pell Grant program mandatory to provide a regular stream of funding and eliminate the practice of "backfilling" billions of dollars in Pell shortfalls each year. It also effectively eliminates the so-called "cliff effect," which would have reduced the size of the Pell when the support levels mandated by the College Cost Reduction and Access Act (CCRAA) and the Stimulus Package (H.R. 1) are phased out. If approved by Congress, it would establish $5,550 as the new base appropriation.
Federal Family Education Loans
The FFEL program "needlessly costs taxpayers billions of dollars" and has "subjected students to uncertainty because of turmoil in the financial markets," according to the budget proposal. The president's budget recommends the elimination of the FFEL program and the origination of all new loans through the Direct Loan program. The budget proposal estimates a savings of more than $4 billion a year, and reinvests it in aid to students. Collections and servicing of loans would be outsourced to multiple private sector contractors.
Federal Perkins Loans
The budget also makes campus-based, low-interest loans more widely available through a new "modernized" Perkins Loan program. The revolving fund to support this modernized version would no longer be campus-based, but will operate at the federal level. Expectations exist regarding the use of "leveraged" funds from institutions, and other sources which will influence allocation strategies for the program. The government will be working out further details on this loan program over the coming weeks and months.
Helping At-Risk Students Complete College
The budget includes a new five-year, $2.5 billion Access and Completion Incentive Fund to support innovative federal/state partnerships to help low-income students to succeed and complete their college education. The program will include a required and rigorous research and evaluation component, to ensure that we learn from what works. These funds would also be included in mandatory spending.
American Opportunity Tax Credit
The budget proposes to make permanent the $2,500 American Opportunity Tax Credit created in the American Recovery and Reinvestment Act of 2009. This tax credit is partially refundable.
Ending FFELP
The president's plan to eliminate FFELP sent shock waves through the industry. Stock prices for FFELP lenders plunged and FFELP supporters vocally decried the proposal. Meanwhile, Direct Loan program supporters were equally vocal in supporting Obama's proposal.
There are many FFELP supporters in Congress and Howard "Buck" McKeon (R-CA), the ranking Republican on the House Education and Labor Committee summarized their disagreement with President Obama's proposal.
"The Administration proposes a government takeover of the private sector-based student loan program, taking away options and benefits from students while adding tens of billions to the government's balance sheet," McKeon said in a press release.
On the other side, long-time Direct Loan supporter Thomas Petri (R-WI) extolled the virtues of Obama's plan.
"For years I have argued that Direct loans managed by the Education Department, by eliminating the subsidized middlemen, have proved to be a far better deal for the taxpayers while providing the exact same loans to students," Petri said in a press release. "The Office of Management and Budget estimates that originating all new loans in the Direct Loan Program would save taxpayers $24.3 billion over five years and $47.5 over ten years, so the President has clearly made the right choice here."
FFELP participants disputed the budget savings and highlighted the services provided to students by the private-public partnership.
"The administration suggests that $4 billion a year can be saved by originating all new federal student loans in the form of Direct student loans," a Consumer Bankers Association (CBA) press release stated. "Direct loans are funded directly by the U.S. Treasury and would contribute to a further increase to the federal debt."
"[The FFELP] has offered to students and schools choice and competition among student loan providers, as well as essential value-added benefits such as college outreach, debt management and financial literacy," according to the Education Finance Council (EFC).
FFELP critics and Direct Loan Program supporters had a different take.
"For years, lenders and banks have been overly-subsidized to deliver student loans," Rich Williams, higher education associate at the United States Public Interest Research Group (U.S. PIRG) said in a press release. "USPIRG supports a more efficient and more reliable student loan system. We need a system that benefits students, rather than banks."
It remains unknown if the Obama administration will be successful in eliminating FFELP, but it is clear that the 2010 budget blueprint has reinvigorated the long and sometimes unpleasant FFELP vs. Direct Loan debate, which will play out over the coming months as Congress takes up the FY 2010 budget process.
Media Coverage
Obama's Budget Blockbuster Inside Higher Ed
President's Budget Would End Bank-Based Student Lending and Significantly Expand Pell Grants The Chronicle of Higher Education
Highlights of President Obama's Budget for Education and Research for the 2010 Fiscal Year The Chronicle of Higher Education
Obama would spend more to make college affordable Associated Press
Nelnet stock drops with call to end student loan subsidies Omaha World-Herald
Obama swings axe at US student loan program Reuters
Drilling Down on the Budget: Student Loans The New York Times
Sallie Mae tumbles on Obama's budget proposal American City Business Journals
Shares of student lenders fall on Obama proposal Associated Press
Obama Calls for End to Loan Subsidy for Sallie Mae Bloomberg
Obama's budget promises aid for college costs The Detroit Free Press
Student loan companies' shares plunge on Obama proposal The Los Angeles Times
Obama's grant plan is lauded Press-Telegram
White House Plan Would End Subsidies to Student Lenders The Washington Post
Big Changes on the Way in Lending to Students The New York Times
Obama aims high for higher education USA Today
Press Releases and Statements
Sallie Mae Issues Statement
The Institute for College Access and Success
Consumer Bankers Association (CBA)
Education Finance Council
Posted 02/27/09 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web site questions or comments to Web@NASFAA.org.
