Congress and the White House are playing tug-of-war over student financial aid, and one local company has a big stake in the outcome.
Edamerica has been one of the nation’s largest originators of loans under the Federal Family Education Loan program, also known as FFELP. President Barack Obama has proposed eliminating the program in favor of direct government lending, and while that effort has sparked opposition in Congress, companies like Edamerica are watching closely because the proposal would force a major shake-up in their business model.
Tony Hollin, chairman and CEO of Edamerica, said his company offers other products and services, but FFELP loans are “by far the number one thing (we offer).”
“And if they basically eliminate it, it wouldn’t mean disaster tomorrow,” he said, “but … (by) July of 2010 it would cause us to have to transform what we do as a company.”
The policy dispute centers on two different loan programs with ties to the federal government. Under FFELP, a wide variety of private firms make loans, which are insured by guaranty agencies — including the Tennessee Student Assistance Corp. — and re-insured by the federal government. 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. However, in a low-interest rate environment — when lenders like Edamerica can obtain funds at a lower cost — they must remit earnings above the guaranteed return back to the government.
Under the federal direct loan program, on the other hand, the government issues financial aid directly to students. Both programs’ offerings include Stafford and PLUS loans.
As a presidential candidate, Obama criticized the government payments offered under FFELP, saying on his campaign Web site that “We shouldn’t be providing billions in taxpayer-funded giveaways to private banks; we should be providing an affordable, accessible college education to every American.”
In an interview, Hollin emphasized the fact that Edamerica pays money back to the government in the current rate environment, and made reference to the fact that in 2007 Congress cut the allowance payment to lenders by 0.55 percent.
“Now that (reduction) all came out of profit,” he said. “And so basically the yield on these loans dropped considerably.”
Hollin argues that eliminating FFELP would undercut competition and cause a drop in customer service, but critics of FFELP put a different spin on the issue. A fact sheet on the Web site of U.S. Rep. Tom Petri, a Wisconsin Republican, argues that all lenders are guaranteed an identical subsidy regardless of their efficiency and costs.
“All lenders compete among themselves for market share, but not to the benefit of taxpayers,” the fact sheet said.
Tennessee’s two U.S. senators — Republicans Lamar Alexander of Maryville and Bob Corker of Chattanooga — both favor preserving FFELP.
“Packing up the nation’s successful student-lending program and sending it to Washington to be administered there is not what students and universities want,” said Alexander, a former U.S. secretary of education and former president of the University of Tennessee.
Alexander attached an amendment to the Senate version of Obama’s budget that would keep the student-loan program intact. The Senate approved Alexander’s amendment, but the House version of the budget did not include similar language. Negotiators for the two chambers will have to come up with the final budget bill. Corker was a cosponsor of Alexander’s amendment.
U.S. Rep. John J. Duncan Jr., R-Knoxville, also opposes the White House plan to nationalize the student-loan industry and eliminate independent student-loan providers.
“I’ve never seen anything the federal government could do more economically or more efficiently than the private sector,” Duncan said. “If they get this through, they will be making a very drastic, very radical change in a program that has been going on for 43 years.”
As for Edamerica, Hollin said the firm is preparing for the possibility that FFELP could go away, although he declined to give details.
“The way I run this business is I have 425 families that I have to think about how do we keep as many of these people employed and moving forward,” he said. “And so obviously we have contingency plans out there in the marketplace.”
A related company, Edfinancial, could be affected by the Obama administration’s proposal, but not in the same way.
Edfinancial is a loan-servicing company, with functions that include collecting payments from students.
Hollin said the majority of Edfinancial’s revenues come from FFELP, but they also service private, nonguaranteed loans. And if the Obama plan is implemented, Edfinancial might also compete to do servicing work on the government loans.
If the competition is based on quality and service, he said, Edfinancial will be at the front.
“If it’s based on size and politics, we probably won’t be at the table,” he added.
Business writer Josh Flory may be reached at 865-342-6994. Michael Collins may be reached at 202-408-2711.
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