To Our School Customers:

Considerable industry and media attention has been spent on legislation pending in Congress that would make significant changes to the student loan program. House and Senate bills would cut as much as $19 billion from the Federal Family Education Loan (FFEL) Program to increase funding for Pell Grants and other student benefits. Additional legislation would address preferred lender lists and other related issues.

One issue, however, has not received as much attention.

The House and Senate-approved budget reconciliation bills contain "pilot" auction programs designed to restructure the FFEL Program.

House proposal

The House bill authorizes the Department of Education and the Department of Treasury to structure an auction system after three types of market-based mechanisms have been examined. Specifically, the government would auction the "right" to make federally guaranteed loans with the winners determined by a bidding process designed to select the lenders willing to accept the lowest payments from the government. A "pilot" program would follow and apply to 10 percent of all FFEL loans in the first year and 20 percent of all FFEL loans in the second year. Upon completion of the pilot and an evaluation by the Government Accountability Office, the Secretary of Education would be authorized to implement the approach for the entire FFEL Program.

Senate proposal

Beginning in July 2009, all parent PLUS loans could be provided by only those lenders that had won the rights to make those loans through competitive auctions. Two winning lenders in each state would ultimately be allowed to make the loans for two years. This would apply to all new borrowers applying for loans for a two-year period following the auction. At the end of the two-year period, the auction process would be repeated in each state. Borrowers who consolidate their loan could choose among any eligible lenders; however, the lender that provided the original loan would have the option of matching any terms offered by other lenders.

Bipartisan letter

A bipartisan group of 20 House members have issued a letter calling for more time to study the consequences of an auction. Concerned about the broad authority that the House proposal gives to the next Secretary of Education to implement a yet-to-be-determined auction structure for all FFEL loans, the bipartisan group of lawmakers state: "We ask that the conference include language that returns authority for the decision of this magnitude — a program-wide auction of the FFEL Program — back to Congress where it belongs. It is important that careful consideration of the consequences of such an auction occur and that Congress seek recommendations at the conclusion of the report before a pilot program moves forward."

A copy of the July 30 letter is available on Sallie Mae’s Straight Talk website.

Secretary of Education warning

An August 3 letter from Secretary of Education Margaret Spellings also warns about the two auction proposals. According to the Secretary, "I strongly believe that we must proceed with great caution in entering the student auction arena. The auction provisions in both the House and Senate versions of H.R. 2669 would involve enormous implementation challenges that threaten to disrupt services and loan availability to students."

Impact

• We agree with the bipartisan group of House members calling for more time to study the consequences of an auction system. It is not clear to us how a reduction in the number of participants in the program is in the best interests of students.
• We worry that by placing a premium only on price, an auction could degrade the quality of loan service provided to borrowers and schools.

Congressional negotiations

Congressional staff is working during the August recess to reach a final compromise between the two respective budget reconciliation bills. A short window of time — approximately two to four weeks — remains before a final decision is reached on how to proceed. Input from the higher education community is vital to this process, so that borrowers and postsecondary institutions do not experience unnecessary and unintended consequences.

Sincerely,

Kevin Moehn
Executive Vice President