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Washington Partner Perspectives For June 12, 2008

Washington Partner Perspectives for June 18, 2008 Today’s questions are answered by John Dean, a principal of the firm, and focus on the current state of the 2008 student loan industry.

Dean served as an associate counsel to the Committee on Education and Labor in the 1980’s and has represented financial institutions and others involved in the Federal student aid programs since leaving Capitol Hill. Dean also serves as the chairman of Higher Education Washington, Inc. and is a practicing attorney.

In December, you predicted 2008 would be a better year for the student loan industry. Six months later, do you still think that it’s been better than 2007?

Dean:
No, I was wrong. This year has been full of surprises. I didn’t foresee the collapse of the auction rate securities market, and I underestimated the potential for a loan access problem.

There have been some major events impacting the student loan industry this year, what is the most significant development?

Dean:
Well, as I said, the failure of the auction rate securities market has had a tremendous impact on what is happening in the student loan industry. Over 100 lenders have indicated they will stop making student loans in the fall. Some of them are gone for good. This is pretty significant.

If so many lenders have left, what do you think will happen in the summer when applications for student loans peak?

Dean:
Given Congress’ actions to help address the liquidity crisis with the passage of the Ensuring Continued Access to Student Loans Act of 2008, every student should be able to secure the loans they need. At this time, it appears this legislation has persuaded larger lenders to continue offering open access to student loans. However, the implementation process is dragging on longer than many observers had expected so we won’t really know the full impact until the final regulations are issued at the end of June.

Do you have any concerns?

Dean:
Yes. I’m not sure the economic problems facing student loan lenders are well understood on the Hill. This is a problem. Legislators are concerned that some lenders are choosing not to lend to certain schools, such as two-year programs or schools where students have a higher default rate and don’t seem to accept that lenders cannot make loans on which they lose money. Fortunately, some big lenders are making loans to all students and I hope this will resolve the concerns about lending patterns. That will be good, but it still won’t slay the 800 pound gorilla—the fact that the return on FFEL loans is too low.

A number of schools have been switching to the Direct Loan Program that is administered by the U.S. Department of Education. Secretary Spellings has expressed confidence that the Direct Loan Program can handle the increased capacity. Is there any reason to think otherwise?

Dean:
I’m willing to give Secretary Spellings the benefit of the doubt but would note that some experts—people directly involved in servicing loans—question whether the Department could handle a sudden doubling of the size of Direct Loans. As of right now, that doesn’t appear likely to happen. However, if it did, I would be worried, especially since it wouldn’t be the first time that demand overwhelmed capacity in the direct loan program. In 1997, as some recall, there was a sudden increase in loan consolidations that put tremendous strain on the Direct Loan Program and Congress was forced to intervene. If there is an unexpected increase in volume that exceeds even what the Department has anticipated, then additional measures will be required.

Now that we know who the nominees will be for both parties, do you have any insights on how they may manage student loan policies?

Dean:
I think it’s too soon to tell. During the primary season, the economy and the war dominated the public agenda. As we go into the general election, we’ll have to watch very carefully. I don’t think we’ll see as much of an emphasis on education as we did during President Bush’s first campaign because circumstances were very different.

I will say that it would be stupid to jump to any conclusions about either Obama or McCain on student loans. I think both will take a closer look at student loans in coming months, especially because the situation is evolving pretty rapidly.

There is a lot to keep our eyes on so stay tuned . . . .


Washington Partners, LLC is a full service government affairs and public relations consulting firm that has built a reputation for producing results. The partners - long-term insiders in education policy - came together in 2002 to form Washington Partners, LLC. The firm boasts a staff of strategic and innovative thinkers providing a wide array of services that are customized to meet clients' needs. By consistently exceeding client goals and expectations, the firm's client list continues to grow. The firm's website may be found at: www.wpllc.net.

"Partner Perspectives" is produced weekly by Higher Education Washington, Inc. and is available on both the Washington Partners, LLC website and under "Opinions and Interviews" in the HEWI Quad located at www.hewiquad.net. Opinions expressed in "Partner Perspectives" are those of the person interviewed and not those of Washington Partners, LLC, its clients, or of Higher Education Washington or the HEWI Quad.

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