Senate Must Act to Temper Cuts, ASLP Urges
WASHINGTON, July 18 /PRNewswire/ -- "The die has yet to be cast-the
potential catastrophic impact of the proposed $18 billion cuts in student
loans can be averted," Kevin Bruns, executive director of America's Student
Loan Providers, said in response to independent analysis released today by
Mark Kantrowitz, Publisher of FinAid.org. The study examines proposed cuts
to the Federal Family Education Loan Program (FFELP).
"This new independent analysis speaks for itself," Kevin Bruns said.
"Kantrowitz's examination exposes the irrationality of making severe cuts
in lender payments when margins are already thin and much rides on FFELP's
continued operation as a source of low-cost college loans."
The new analysis (http://www.finaid.org/educators/2007subsidycuts.txt)
is largely consistent with a recent report by the Congressional Research
Service, concluding that Sallie Mae's after-tax margin was less than a half
a cent on the dollar (excerpt below). The erroneous, unproven perception
that lenders earn "excessive" or "massive" profits has been cited as
grounds for the proposed $18-20 billion cuts now before Congress.
"The message to Congress and families nationwide is clear," Bruns
continued. "The die has yet to be cast-the potential catastrophic impact of
the proposed $18 billion cuts in student loans can be averted. The truth
about the severity of the cuts ought now to govern Congress's next steps-
support the bipartisan Nelson-Burr amendment.
"The Nelson-Burr Amendment bridges the desires of those who, on the one
hand, support an increase in need-based aid for low-income families and, on
the other hand, want to avoid increasing loan costs for families and doing
irreparable, significant harm to FFELP."
The Nelson-Burr amendment does not eliminate major cuts to for-profit
lenders -- it reduces them to a level that would permit lenders to continue
to offer borrowers some level of price discounts and high quality service.
It seeks to preserve a strong private sector-based loan program that offers
students and parents the choice of private lenders that compete to offer
federal student loans. The amendment allows for a much-needed Pell Grant
increase that would make college more affordable.
Highlights of FinAid.Org Analysis
Bp= basis points
http://www.finaid.org/educators/2007subsidycuts.txt
[P]pending legislation involves cuts to more than just SAP. It also
involves decreases in the lender insurance percentage and increases in the
lender-paid origination fees. This message analyzes the combined impact of
these subsidy cuts ...
***
Focusing on the impact on exceptional performers, which represent
approximately 80% of all education lenders, the President's Budget and the
Senate would cut the insurance percentage by 2% and the House by 4%. This
yields the following impact on yield from the cuts in insurance percentage:
Impact of Risk Sharing on Yield:
[a] President's Budget: 2.72 bp to 1.79 bp
[b] House: 5.44 bp to 3.58 bp
[c] Senate: 2.72 bp to 1.79 bp
***
This yields the following impact on yield from the increases in lender-
paid origination fees:
Impact of Lender-Paid Origination Fees:
[a] President's Budget: 10.03 bp to 5.24 bp
[b] House: 7.02 bp to 3.67 bp
[c] Senate: 10.03 bp to 5.24 bp
***
Assuming 4% PLUS loan volume and 96% Stafford/Consolidation loan
volume, the weighted average of the SAP cuts are as follows:
Impact of the SAP cuts:
[a] President's Budget: 50.00 bp
[b] House: 56.20 bp
[c] Senate: 51.20 bp
Combining the impact of the risk sharing and lender-paid origination
fees with the SAP cuts yields the following total impact on yield:
Total Impact of Subsidy Cuts on Yield:
[a] President's Budget: 62.75 bp to 57.03 bp
[b] House: 68.66 bp to 63.45 bp
[c] Senate: 63.95 bp to 58.23 bp
Percentage Cut in Profits After Subsidy Cuts:
[a] President's Budget: 87% to 79%
[b] House: 99% to 90%
[c] Senate: 89% to 81%
Since these cuts represent a 81% to 99% cut in Sallie Mae profits from
the loans, it is highly likely that most of Sallie Mae's profit from newly
originated loans after the subsidy cuts will derive from servicing the
loans and collecting defaulted loans, along with revenue from private
student loans.
The proposed subsidy cuts, especially those passed by the House,
represent a severe cut in profits for education lenders. The cuts are
severe enough that they may leave many smaller lenders unprofitable. The
cuts are severe enough that industry-wide profit levels may fall
significantly below comparable benchmarks for consumer finance companies.
This may be contrary to Congress's intent to focus public dollars on
students while still allowing education lenders to retain a reasonable
level of profit. If that were not Congress's intent, it would be simpler
for Congress to repeal the FFELP program.
Accordingly, Congress may wish to consider scaling back the subsidy
cuts to just the 50 bp SAP cut, eliminating the proposed reduction in
insurance percentage and increase in lender-paid origination fees.**
http://www.finaid.org/educators/2007subsidycuts.txt
Highlights of CRS Report
Table:
7.43 average coupon rate" paid by students
-5.25 payment to investors
2.18 excess spread
2.18 excess spread
-0.70 origination costs, servicing costs, and "borrower benefits"
-0.75 "average" of lender origination fees and consolidation offset fees
for Sallie Mae portfolio
-0.27 income taxes (goes to the government)
-0.45 Sallie Mae profit
0.000 (rounding error)
America's Student Loan Providers represents 89 of the nation's leading
private, nonprofit and state-based education and financial organizations
that provide guaranteed student loans through the Federal Family Education
Loan (FFEL) Program. By leveraging private financial markets and competing
for the right to lend to students, ASLP members offer low-cost loans to
millions of students and superior levels of service to most of the
approximately 5,000 postsecondary institutions that participate in the FFEL
program. More information is available at http://www.aslp.us or call 202.721.1190.
SOURCE America's Student Loan Providers
 back to top
Related links:
http://www.aslp.us/
CONTACT:
Kevin Bruns of America's Student Loan
Providers, +1-202-721-1190, Kevin@aslp.info
|
