Risky Plan to Bail Out Non-Profit Lenders Gets Hearing

by Jason Delisle

An Unnecessary Solution

To demonstrate how influence trumps good policy let's consider one policy that Kanjorski promotes on behalf of non-profit lenders.

As part of ECASLA, Congress allowed private lenders to sell their loans to the Department of Education. The policy ensures that the federal student loan market remains liquid. Lenders are more apt to make federal loans if they know that there is a willing buyer who can give them cash for the loan if they need it. The Department chose to implement the loan purchase authority for new student loans (those issued for the 2008-2009 academic year) even though ECASLA gave it the authority to buy loans issued as early as 2003. Kanjorski has chastised the Department for not buying earlier issued loans, an action he claims would help non-profit lenders. In reality, the Department acted responsibly by protecting the interests of taxpayers; Kanjorski's proposal, on the other hand, would benefit lenders at taxpayers' expense.

If lenders were allowed to sell loans that they made prior to 2008, then they could cherry pick their least profitable and most risky loans and unload them on the Department, keeping only the best loans on their books. (Lenders have been doing something similar with federal consolidation loans for years, forcing delinquent borrowers into the direct loan program rather than making the loans themselves).

The White House Office of Management and Budget and the Department of Treasury recognized the potential for cherry picking scenario in their risk assessment of the loan purchase program. Loans issued prior to 2008 would likely have enough performance history for a lender to assess default risk and flip riskier loans to the Department. But lenders are less able to make such determinations for new loans that lack a performance history. As a result, the Department of Education limited its loan purchase agreement to 2008-2009 loans only.

In condemning the prudent course the Department has taken, Kanjorski puts the interests of non-profit student lenders before the interests of taxpayers. Meanwhile, students aren't having any problem getting federal student loans. Of course, the hearing isn't really about them anyway.

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