Lately there has been a lot of talk about eliminating the public-private student loan partnership program known as FFEL (Federal Family Education Loan). The USSA stands firmly behind this objective, as the money saved from ending bank subsidies would help fund increases in the Pell grant.
There is, however, another reason why the FFEL program simply doesn't work: inefficiency brought on by an unnecessary middle man. See, while private banks provide loans, the money in administered by 35 guaranty agencies. While these agencies may have been helpful in the 1960s, when the federal government was new at financial aid distribution, decades of involvement by the U.S. Education Department has rendered them superfluous.
Additionally, the government curiously employs guaranty agencies to engage in two contradictory operations. First, the agencies receive fees for helping student borrowers avoid defaulting on their loans; second, they earn much larger fees if they collect borrowers' defaulted loans. In fact, last year these agencies received just $177 million for default aversion fees and a whopping $948 million for collecting defaulted loans. Not much incentive for the supposed neutral brokers to help students avoid defaulting on their loans...
This mandate is an egregious misuse of public funds, $1.57 billion in fiscal year 2008 specifically, aside from the fact that doesn't make sense to have these agencies carry out two fundamentally different tasks--and be paid for both!
This confusion and contradiction is just one more reason why President Obama's proposal to eliminate the FFEL program to further fund the Pell grant must become law.
You can read the New American Foundation's full report on this issue by clicking here.
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