House Panel Debates Student
Loan Consolidation Policy
March 19, 2004 - The House Education and Workforce
Committee March 17 held a hearing
on federal student loan consolidation policies, and in particular
the issue of whether borrowers should pay a fixed or a variable
interest rate. The hearing, entitled "Fiscal Responsibility
and Federal Consolidation Loans: Examining Cost Implications
for Taxpayers, Students and Borrowers," continues the
committee's string of hearings leading up to the reauthorization
of the Higher Education Act.
In his opening statement, Chairman John Boehner (R-Ohio)
asked how the loan consolidation program fits into the committee's
overall goal for reauthorization of expanding access for low
to moderate income students in college today, and those striving
to do so tomorrow. Chairman Boehner expressed a clear preference
that the limited resources available to the committee should
be targeted at current and future students, and that he agreed
with arguments that maintaining a fixed rate consolidation
program in the current interest rate environment could hamstring
the federal government as interest rates, and therefore subsidy
costs, increase. He stated, "If left on autopilot, costs
could balloon, taking away potential benefits to those we
are trying to help." Responding on behalf of the Democrats,
Rep. Dale Kildee (D-Mich.) noted that changing the consolidation
program from a fixed to a variable rate would significantly
increase the interest costs for borrowers. Rep. Kildee agreed
that the committee should focus its efforts on improving access
for low to middle income borrowers, but argued it not be achieved
at the expense of borrowers trying to consolidate.
The first witness, Cornelia Ashby, director of Education,
Workforce and Income Security Issues at the General Accounting
Office (GAO), presented the results of a GAO report, "Student
Loan Programs: As Federal Costs of Loan Consolidation Rise,
Other Options Should Be Examined" (GAO-04-101),
that was released in October 2003. The reports states that
under the current historically low interest rates, the guaranteed
lender yield on federal consolidation loans is actually lower
than the interest rate being paid on the loans, meaning there
is no subsidy paid to lenders, and a net positive revenue
flow to the federal government. However, the report goes on
to state that if interest rates increase in the future, as
experts predict, the federal government will be required to
make significant subsidy payments to lenders. The report also
shows that the increased volume of loan consolidations that
has accompanied the recent drop in interest rates has also
contributed to increased costs. GAO recommends the Department
of Education assess the advantages of restructuring the consolidation
program to target borrowers at risk of default, make more
non-consolidation repayment options available to borrowers,
and change from a fixed to a variable rate.
The hearing also included testimony from two witnesses who
have conducted independent analyses of the program. Thomas
Neubig, Ph.D., national director of Quantitative Economics
and Statistics at Ernst and Young, LLP, concluded that the
net cost of maintaining a fixed rate consolidation program
would be a positive over time if the Congressional Budget
Office's interest rate projections are used. This conclusion
is based on the fact that currently, as rates have been dropping,
the subsidies paid to lenders have been less than the revenues
generated from origination fees and consolidation loan holder
fees. Dr. Neubig estimated that consolidation loans made between
FY 2003 and FY 2006, when CBO estimates interest rates will
be increasing, would generate significant subsidy costs to
the federal government; however, as interest rates stabilize
in FY 2007 and beyond under the CBO projection, Dr. Neubig
estimates that the net effect to the federal government will
again become positive. Robert Shapiro, Ph.D., chairman of
Sonecon, LLP, and senior fellow at the Brookings Institutions
and the Progressive Policy Institute, offered a conflicting
analysis, arguing that the long-term effects of maintaining
a fixed interest rate consolidation program would cost the
federal government significantly more than other estimates.
Dr. Shapiro's analysis is based on studying updated consolidation
rates, and the costs to the federal government over the entire
length of a consolidation loan, 80 percent of which he states
are repaid over 20 years or longer. Dr. Shapiro also put forward
the generational inequity argument, and noted that both the
costs and the inequities could be addressed by shifting the
consolidation loan program to a variable interest rate.
Information:
Jonathan Fishburn, Director, Research, Education and Veterans' Legislative Affairs
AAMC Government Relations
jfishburn@aamc.org
(202) 828-0525
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