munky.org|v3.0

Removing the FFELP would dramatically alter the education financing landscape

I started wondering if Obama’s claim that doing away with the FFELP -  Federal Family Education Loan Program - would actually save taxpayers money, so I started doing some digging. Thankfully, someone did the leg work for me. I did a quick check through their numbers and seen that they were pretty accurate in their claims.

The administration claims that they will reduce costs by $4 billion dollars a year (read original article on munky.org here), mainly due to removing the subsidies. However, in 2006, when the same argument existed, America’s Student Loan Providers released a whitepaper outlining flaws in the math. The government had significantly overstated the cost of subsidies for FFELP and significant understated subsidies for the Direct Loan Program.

Now I could sit here and explain it, but the boys over at studentloanfacts.org have done a pretty good doing that for me. Quoting from the source, what is in the government’s version, and how it was changed:

 

 

• Count FFEL program costs for 1992 and 1993 – years in which the Direct Loan program did not exist – Eliminating them makes cost estimates fairer and more meaningful.

Effect on Subsidy Rates: FFEL program, reduced to 9.10 percent; Direct Loan program, increased to 1.76 percent.

• Include cost estimates for 2002-2004, years whose loan cohorts have yet to go into repayment – Eliminating them makes estimates more reliable and fairer.

Effect on Subsidy Rates: FFEL program, reduced to 8.66 percent; Direct Loan program, increased to 3.83 percent — cost differential is reduced to 4.83 percent.

• Do not include the Direct Loan program’s administrative costs – Counting them makes estimates more accurate and fairer.

Effect on Subsidy Rates: FFEL program, increased to 9.52 percent; Direct Loan program, increased to 6.23 percent — cost differential is reduced to 3.29 percent.

• Do not include tax revenues generated by FFEL program loan providers – Including tax revenues makes estimates more accurate and fairer.

Effect on Subsidy Rates: FFEL program, decreased to 7.62 percent; Direct Loan program, decreased to 6.17 percent — cost differential is reduced to 1.45 percent.

• Do not account for the risks to direct loans from defaults, consolidations or interest rate fluctuations – Adding a risk premium of 0.25 percent to the government’s discount rate makes estimates more accurate and fairer.

Effect on Subsidy Rates: FFEL program, remains at 7.62 percent; Direct Loan program, increased to 7.67 percent — cost differential is eliminated. 

As usual, the government does a half-ass job of figuring the true cost of things. All this in an attempt to look like they are doing something positive. Positive things lead to re-elections, we know how that story goes.

What the FFELP really does for us is give us expanded options for providing student loans. It creates competition, keeping rates in check, and provided a benefit to loan providers by offering special rate reductions. These rate reductions add up.

Plus the government is a poor manager of money, and is unqualified to act as a bank. Part of the reason I’m vehemently against the nationalization of banks.

Want the facts? Go to the Federal Student Loans Fast Facts page on studentloanfacts.org. Then write your congressman. Thankfully about.com has a good page with tips and how to find out who your congressperson is – just click here to find out more.