Congress hasn't yet signed off on plans to eliminate a student-loan program with strong ties to a local company, but an Obama administration official hinted this week that the change is inevitable.That's bad news for student loan companies like Knoxville-based Edamerica, but backers of the program aren't giving up yet.
The debate centers on President Barack Obama's plan to eliminate the Federal Family Education Loan program - also known as FFELP - in favor of direct government lending. Under FFELP, lenders are guaranteed a certain return on their loans, with the government making an allowance payment if the interest paid by students isn't sufficient to meet the guarantee. In a low-interest rate environment - when lenders like Edamerica can obtain funds at a lower cost - they have to remit earnings above the guaranteed return back to the government.
On a conference call this week, U.S. Department of Education officials and members of Congress extolled a bill - dubbed the Student Aid and Fiscal Responsibility Act, or SAFRA - which would eliminate FFELP, among other steps. The legislation was touted as a way to guarantee dependable student access to federal financial aid and to save more than $87 billion over 10 years.
During the call, officials were asked about opposition from schools like the University of Notre Dame, whose director of student financial strategies has said that a bill eliminating choice and competition and forcing schools into the direct lending program next year would create "massive confusion."
Robert Shireman, deputy under secretary at the U.S. Department of Education, replied by saying there is plenty of time to make the transition. Shireman went on to say that the change "is something that is coming," noting that emergency legislation to support the FFELP program was enacted last year, but expires at the end of the 2009-10 school year.
Until recently, firms like Edamerica typically sold their student loans on the secondary market. The national credit crunch crippled that market, though, and in 2008 Congress implemented a safety net, authorizing the government to buy certain loans or to buy a "participation interest" in eligible loans if there was no market for them elsewhere.
In July, opponents of the Obama plan floated an alternative that would essentially make the existing system permanent and is aimed at allowing lenders to make student loans using their own funds. Those loans would immediately be placed with the government and, once the money was fully disbursed, the loan would be sold to the government.
The plan also would eliminate lender subsidies and establish a fee-for-service system for loan originations and servicing.
Opponents of the Obama plan aren't buying the idea that it's inevitable.
In a prepared statement, Tony Hollin, chairman and CEO of Edamerica and Knoxville-based loan-servicing company Edfinancial Services, said the proposal would increase Treasury borrowing and harm counseling and service quality for student borrowers.
"This is not a foregone conclusion," he said. "It's an ongoing debate about jobs, debt and, most of all, students. If SAFRA is enacted, as many as 35,000 jobs will be lost nationwide, including some right here in Knoxville, at a time when jobs are precious and the economy is struggling."
Edamerica has about two dozen marketing representatives around the country, plus managers and support staff who work in Knoxville. But Edfinancial, the loan-servicing company, has more than 400 people who work in Knoxville.
Laura Bower, a vice president at Edfinancial, said there would definitely be staff adjustments at Edamerica if the Obama proposal is adopted, although she said key employees of that company would be retained to manage relationships with colleges and promote other offerings such as call center or collection services.
At Edfinancial, she said, a department that supports the loan-origination functions of clients would be impacted. On the other hand, she said employees in that department will have work to do through the first nine months of 2010, and the plan is to move them into other positions if necessary. Other workers also could be affected, but Bower said the situation is fluid and emphasized that while the company has contingency plans in place, "the fat lady has not sung yet."
And despite Shireman's prediction, the two sides are continuing to spar over the relative merits of their proposals. In an interview this week, Edamerica's senior vice president, Elena Lubimtsev, questioned the estimated savings, noting that while the Congressional Budget Office initially said switching from FFELP to direct lending would result in a net savings of $80 billion over 10 years, the savings shrank to only $47 billion when accounting for the risk of higher-than-projected defaults.
But on the conference call, U.S. Education Secretary Arne Duncan said the savings are real and said that around 800 schools have already moved from the FFELP program to the direct lending program in the past year.
"So far that transition's gone impeccably well," Duncan said.
Business writer Josh Flory may be reached at 865-342-6994.
Return to Edamerica in the News