Fri
Mar 26 2010
11:37 am

NYT: Overhaul of Student Loans Passes Congress:

"The Democratic majority decided, well look, while we’re at it, let’s have another Washington takeover," said Senator Lamar Alexander, Republican of Tennessee and a former federal education secretary. "Let’s take over the federal student loan program."

Or to put it another way (from the same article):

Since the bank-based loan program began in 1965, commercial banks like Sallie Mae and Nelnet have received guaranteed federal subsidies to lend money to students, with the government assuming nearly all the risk.

"Why are we paying people to lend the government’s money and then the government guarantees the loan and the government takes back the loan?" said Representative George Miller, Democrat of California and chairman of the Education and Labor Committee.

What most reporters are missing is that this legislation may indeed cost some jobs in Tennessee, which is no doubt the source of Sen. Alexander's ire although it hasn't been widely reported if at all.

Knoxville-based Edamerica (a Nevada corporation headquartered in Knoxville), Edsouth (no TN Sec. of State listing found, but lists the same address as Edamerica on their website), and Edfinancial Services (a Nevada LLC operating out of the same location) are in the business of originating and servicing student loans. Edamerica says on their website that they are the "8th largest student loan provider in the nation and the fastest growing lender in the top ten."

The student loan overahul will no doubt hurt firms such as Edamerica. The good news for Edfinancial Services is that the federal government still plans to outsource student loan servicing. As for other job losses, the federal government likely and universities possibly will have to hire additional staff if banks and other lenders are cut out of the origination business.

As for Sen. Alexander, it is fair to say that he is looking out for his constituents in terms of jobs and employment. It is also fair to say that he is looking out for his corporate constituents, whom he never seems to mention. The following campaign finance info from opensecrets.org regarding William (Tony) Hollin (CEO Edamerica), and Ron Gambill (CEO Edsouth) may be of interest:

HOLLIN, WILLIAM 5/27/09 $1,500 Tenn PAC* (R)
HOLLIN, WILLIAM 11/13/07 $1,000 Alexander, Lamar (R)
HOLLIN, WILLIAM 9/23/04 $1,000 Alexander, Lamar (R)
GAMBILL, RON 9/30/09 $250 Alexander, Lamar (R)
GAMBILL, RON 3/14/08 $250 Alexander, Lamar (R)
GAMBILL, RON 6/25/07 $250 Alexander, Lamar (R)
GAMBILL, RON 12/3/07 $250 Alexander, Lamar (R)

(*Tenn PAC is Lamar Alexander's "leadership PAC.")

The media also isn't mentioning past problems in the $85 billion student loan industry. You may recall New York Attorney General Andrew Cuomo's 2007 probe of student lending practices. Cuomo claimed there was widespread corruption, including questionable revenue sharing deals, college call center staffed by loan company employees posing as university staff, and conflicts of interest involving preferred lenders and university administrators.

Edamerica's various lending and servicing operations were never implicated, but their Edfinancial division's records were subpoenaed in relation to the investigation (Reuters, 4/16/2007).

The probe also prompted an internal review at the University of Tennessee. In a May 17th 2007 article, the Knoxville News Sentinel reported that UT was "reviewing its policies that have allowed two employees to serve on the boards of companies involved in student financial aid at the university." According to the report, the UT Dean of Enrollment Services and Director of Financial Aid had both served on boards "related to Knoxville firm Edfinancial Services."

The report also said that UT had eight "preferred lenders" in the 2000-2001 school year, but the list had been narrowed to two by 2006-2007 - First Tennessee and Edamerica.

PREVIOUSLY:

Student lenders object to Obama student loan reforms
Obama budget expands Pell grants, other student aid
Massive student loan debt and questionable industry practices

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bizgrrl's picture

The Congressional Budget

The Congressional Budget Office said the direct-lending approach would save taxpayers about $61 billion over 10 years.

I thought Alexander was all about low government spending.

I really don't care for mixing different types of legislation in a single bill, student loans and healthcare. Although, maybe this was one of the money-saving things they had to include to pay for the healthcare bill.

Laocoon's picture

Coming Full Circle

The current student loan programs started because the government didn't do a very good job of servicing and collecting on the loans in the 1970s. So now we are back to the 'old way' of doing things. Hopefully the servicing will be better. It should be, as there is much more sophistication in collections.

The new scheme will be a lot less profitable for the firms in the student loan business but they have made a lot of money for a long time. There might be some money in servicing the new loans, but of course that would be much less than they are used to making.

It is about time that the government got the costs to students under control. In the future, to the extent that the government wants to subsidize education, they can do that by lowering the borrowing rates further, allowing for deferments if students enter certain careers, or by other amendments to the program. This would be a great way for example to encourage doctors to enter primary care and to encourage other professions.

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