Speeches & Floor Statements

Floor Remarks of U.S. Senator Lamar Alexander (R-TN) Higher Education

Posted on July 19, 2007

Mr. President, I thank the managers of the bill for giving me the opportunity to speak. I wish to say a few words -- general words -- about the student loan program in our country. The Direct Loan program -- the program by which the Federal Government itself loans money to college students across our country -- began when I was the U.S. Secretary of Education, and the distinguished Senator from Massachusetts was chairman of the Health and Education Committee. We had a Democratic Congress and a Republican President named Bush, although a different Bush. Senator Kennedy will remember the Deputy Secretary was David Kearns, a very distinguished former business leader, head of Xerox. Bill Ford was chairman of the House Education Committee. Chairman Ford very much wanted a so-called Direct Loan Program. He wanted the Government to loan money to students. The law we have today is named after him. He made a great contribution to our Nation's education. I thought about the Direct Loan Program at the time and, generally speaking, I wasn't in favor of it. There were three reasons for my skepticism then. One was that it seemed to me the enormity of the program would mean the Government -- our Federal Government -- would suddenly find itself being a massive bank. Ever since Andrew Jackson, the idea of a big national bank had been something our country hasn't liked. We let the private sector have the banks. The problem with the government operating as a bank was we would have to borrow a lot of money and add to the Federal deficit. Second was the size of the student loan program. Millions and millions of students -- one-half of our college students across the country -- have a Federal loan or grant to help them pay for college, and may choose among any of the accredited colleges. We have about 6,000 institutions that qualify or receive students with these loans. So it is a massive administrative challenge. I could not see how the Federal Government -- the department I was in charge of at that time, the U.S. Department of Education -- with the personnel, as dedicated as they are -- could do a better job than the private sector on such a big administrative challenge. Finally, while I didn't know at the time, I didn't believe there was a way for the Federal Government, with its built-in efficiencies, to do a less expensive job of managing this massive program than the private sector could. I was relying on my gut instinct, which is generally that if you can find it in the Yellow Pages, the Government probably ought not to be doing it. So I came down on the side of having a federally backed student loan program, a generous one, which has grown since then, but that was managed by the private sector. The Government can do a great many things well. Regulation is one of the things it does well. One of the things it generally doesn't do as well -- with the exception of the military -- is manage large programs. The result of that debate was the creation of the Direct Loan Program. In the end, I saw that as an advantage for the country because it at least would give us the opportunity to measure the way the Government would administer a loan program against the way the private sector did it. In other words, it was something we could look at and compare. That is the way we have operated over the last 15, 16 years that this has been in place. Now, I have not changed my view on the so-called Government program, or the Direct Loan Program. I believe almost every aspect of our higher education system in our country can be viewed as a success, including the FELP student loan program. There are roughly 3,200 lenders today participating, with a loan volume of over $50 billion in the current year. The Direct Loan Program was approximately $13.5 billion. The total outstanding amount of loans, FFEL and direct loans, now approaches half a trillion dollars, about $448 billion. We are talking about an immense program that creates great benefits for students all over America. Now, the question that is before us is, if we have this private sector program out there -- and we have been debating this in committee and we have had innumerable meetings on it and we had a vote earlier today -- is the subsidy for the private lenders set at the right level? Obviously, we have all agreed that it is too high. Congress agreed it was too high last year. The President agreed it was too high this year, and he proposed some cuts. Now our committee in the Senate is making additional cuts. My concern is that we are guessing what the subsidy level ought to be. We have our finger up in the wind and are making arbitrary judgments. I am interested in the auction model that has been introduced into this bill. I think that is a useful way to find out what the private markets would tell us about what the right level of taxpayer subsidy is, so this program which loans money to students, who aren't the best credit risks, is at about the right level. But the last auction program was a colossal failure. So that auction program may not tell us much. Another way we might find out the proper level of subsidy would be to try to develop a body of knowledge in the same way that State utility commissions do. In Tennessee and other States -- well, Tennessee is different because we have the Tennessee Valley Authority. But in most States, a State utility commission regulates the rate set for telephones or electricity, and it allows the private company providing that service a reasonable profit. Over the years – despite there being a lot of politics involved, which I remember that very well -- there has developed quite a body of knowledge around the idea of what is an adequate level of subsidy for private companies providing a public service, such as electricity or telephones or, as I suggest, federally backed student loans. Perhaps that is something we could do more of. There was talk about asking the General Accounting Office to study the subsidies in this bill. I don’t know whether that sort of study ended up in the legislation. I hope it did. Looking ahead to the next time we reauthorize this ordeal with student loans, I would like to find out if there is a way to set up an appropriate way to measure what the level of subsidy ought to be for a private company. So we have, first, the idea of the auction which might teach us something. We have the cost of the Direct Loan Program. That could teach us something about the appropriate cost. Finally, perhaps in this legislation, before it is through, if it is not in already included, we can ask GAO to create indices that would help legislators make a better judgment than guessing what an appropriate level of subsidy is. We have an indication from the marketplace. Last week, an equity firm that was seeking to buy Sallie Mae, I believe, said our changes in the level of subsidy made that deal such that they felt it was not profitable for them. So as I understand it, they have backed down. That is a signal the levels we are setting in this bill may make it more difficult to attract a large number of private lenders to the program and, in effect, turn the student loan program more and more towards the Direct Loan Program. In other words, by cutting the subsidies deeper and deeper, we will be driving banks out of the business, especially the smaller ones -- the ones that serve students perhaps in rural areas or in different areas -- and we might be reducing the opportunities students have to benefit from the services that these banks offer. I know some of my colleagues would prefer we turn the whole thing over to the Government. I hope we don't do that -- through the front door or through the back door -- by squeezing out all of the private lenders. My concern is not for the lenders; my concern is for the students who today get loans from 3,200 lenders. I like for students and universities to have those choices. And over the last 15 years, generally speaking, they prefer the program that involves private lenders instead of dealing with the Direct Loan Program that the Government runs. Eighty-three percent of the schools prefer to use the privately backed student loan program, and 76 percent of the student loans are originated by those lenders. Only 1,310 schools participated in the Direct Loan Program, which is a small proportion of the loan volume. The reason may be that the consumers who like choice and who like to have different options have looked at both options -- the program run by the Government and the program run by the private lender -- and they find, the universities and the students, that the privately operated program is better for the students. I am here today more to talk about looking ahead, not condemning this bill or the effort that has been made here. I am here today also to say that the work of the Senate and House committees and some of the States has uncovered abuses by student lenders, some of which have been corrected and the rest ought to be. There is absolutely no excuse for that. But correcting abuses by private student lenders is one thing; cutting the rates to such a point that we end up through the back door pushing the student loan program into a Government-run program, or largely into a Government-run program, is another thing. It would be an unwise step for us to take, and if we are to consider that step, I hope we will do that on a very careful basis. In conclusion, my opinion has not changed based on experience over the last 15 years about the merits of a program largely run by private and nonprofit organizations -- 3,200 of them right now -- to offer choices to millions and millions of students who attend 6,000 universities. To me, almost by definition, the Government is not a good manager of such a large program. In fact, if it were a Government-run program, the Government would have to contract it out. In general, I still support a properly regulated and appropriately subsidized program that allows for the maximum number of student private lenders leaving students and universities choices. Second, I am not persuaded that the Government-run program costs less than the student program. I know there are reports and studies which suggest that it might, but that is because we count money up here in strange ways. If you just take real dollars and compare them to real dollars, I have seen no real evidence that the Direct Loan Program is cheaper for the taxpayers than the program run through the private lenders. Finally, I don't like the idea of the Federal Government suddenly beginning to assume a debt which approaches a half trillion dollars and put it on our books at a time when we are trying to reduce the deficit. If it doesn't cost less, and if the Government is not likely to manage it better, and if we don't need another half trillion dollars of debt in the Federal Government, then why would we want to encourage the growth of a Government-run program over a privately run program? I appreciate the chairman being here while I am making these remarks. I look forward to working with him because he has long experience on this program and he has distinct views on it. I suggest that one of the most constructive things we can do over the next few years is try to create, either through the auction suggestion or by listening to the private markets or from the Government Accountability Office or some other way, something other than a guess about what the private level of subsidy is. Otherwise, we will be doing through the back door something that I really don't think we should be doing through the front door either. I thank the Senators from Massachusetts and Wyoming for their time. I ask unanimous consent to print in the Record some elaboration of my remarks that have to do with the cost comparisons of the Federal and the private programs, the evidence, or lack of it, that the Government can do it better than the private sector, and some questions about why the Federal Government would want to assume more debt. ###