President Obama sent shockwaves through the student loan industry last week when he called on Congress to dismantle the Federal Family Education Loan (FFEL) program next year and use the savings to turn the Pell Grant program into a true entitlement for low-income students by financing it entirely through mandatory funding. The announcement sent the stock prices of the nation’s largest student loan providers into a nosedive.
But investors need not panic, just yet. The Obama administration is sure to have a major battle on its hands — and not just from the usual suspects. While the president’s plan is unlikely to receive many Republican votes (save that of Rep. Tom Petri of Wisconsin, who has been a long time supporter of Direct Lending), the administration’s real challenge is going to be keeping members of its own party in line.
As we have previously reported, the student loan industry has gone to great lengths over the last two years to woo key Democrats. Sallie Mae outlined this strategy in an internal strategy document it produced shortly after the Democrats took control of Congress in 2006. That document, which was obtained by Rep. George Miller (D-CA) and published on this blog, laid out the student loan giant’s plans to target generous campaign contributions toward “Blue Dog and Financial Services Democrats,” as well as members of the Congressional Black and Hispanic Caucuses. A Higher Ed Watch investigation in July 2007 found that Sallie Mae had lived up to its pledge — donating, through its political action committee, more than $100,000 to members of these three groups in the first six months after the election.
The lender’s efforts paid off at least with some of the groups. For example, in February 2008, Sallie Mae and other student loan firms looked to the fiscally-conservative Blue Dog Democrats for help killing a measure in the House of Representatives that would have made it substantially easier for financially distressed borrowers to discharge their private student loan debt in bankruptcy. The loan companies were not disappointed. Altogether, 30 of the 47 Blue Dog members, many of whom were also on the House Financial Services Committee, joined Republicans in opposing the measure, ensuring its defeat. At the same time, more than a dozen Democratic members of the Financial Services Committee helped lead the charge for a massive government bailout of the student loan industry last spring– far beyond what was needed to ensure the widespread availability of federal student loans.
This particular program is lucrative for Congressional local districts, state based government, and guarantors alike.