Federal Family Education Loan (FFEL) program in the United States

By Jason D. Delisle (1)

Following the 2016 election and with the Higher Education Act’s impending reauthorization, prominent lawmakers and interest groups have proposed expanding private lenders’ roles in the government student loan program. More specifically, they seek to restore the federal program to how it operated before the Obama administration’s reforms in 2010.

Under that system, the government mainly insured the loans that private lenders made to students via a guaranteed loan program, also known as the Federal Family Education Loan (FFEL) program. Today, however, the government makes all the loans itself using its own funds through the Direct Loan program. Nevertheless, the Direct Loan program and the defunct FFEL program are really two different designs of the same government-backed student loan program that entail the same kinds of financial risks for taxpayers.

Despite private lenders’ roles in the FFEL program, policymakers designed it such that it offered none of the benefits private markets usually provide. Confusion and misinformation about that key point abound. FFEL program supporters erroneously claim that reverting to the FFEL program would produce budgetary savings. They also mistakenly imply that it reduced risk for taxpayers and students by restricting lending to only credentials that provided a positive return on investment or by varying terms based on the risk of each loan. They also assert that the complete switch to the Direct Loan program in 2010 led to record levels of outstanding student debt and defaults—a claim with no causal basis. (…)

Prominent politicians have indicated their support for a guaranteed loan program. Last year the media reported that President Donald Trump’s campaign was “planning on moving the government out of lending and restoring that role to private banks, as was the case before President Barack Obama fully shifted loan origination from private lenders to the government.”(2)

Rep. Virginia Foxx (R-NC), the Republican chairman of the House Committee on Education and the Workforce, said following the 2016 election that she wants to reverse a Democratic Congress’ decision in 2010 to make all federal student loans through the Direct Loan program. (3) Likewise, the 2016 Republican Party platform stated that “the federal government should not be in the business of originating student loans . . . [and] private sector participation in student financing should be restored.” (4)

Private lenders, and the trade associations representing them, also say the government loan program should make more use of private capital. In laying out its postelection agenda, the Consumer Bankers Association said “banks should play a bigger role in the federal student loan program because of the benefits private lenders bring to the table.”(5) A trade association representing student loan companies wants to restore the FFEL program because “the prior system of a public‐private partnership for funding and administering student loans was and would still prove to be a more beneficial approach for students, families, and taxpayers.”(6)

Thus, the most specific proposal so far to expand private lenders’ roles in the student loan market is to reinstate the FFEL program, which would likely replace or compete with the government’s Direct Loan program. That might seem to some an effective way to harness the efficiencies and innovations that private lenders can offer students and taxpayers.

A closer look at the FFEL loan program reveals that it involved private capital in name only. The program was designed to shield lenders from risk using taxpayer dollars, preclude lenders from restricting access to only the most creditworthy borrowers, and prohibit lenders from using prices (i.e., interest rates) to provide signals to borrowers about the quality of different educational choices. In other words, the FFEL program offered none of the benefits one might associate with private markets. Moreover, efforts to restore it distract from alternative policies that would actually bring the benefits of private lending to bear in the student loan market

To inform policymakers and others in the policy community about how the FFEL program cannot accomplish the goals its proponents endorse, this report provides a detailed look at that now-defunct program. It explains how FFEL operated and why it was even more heavily subsidized—and costly—than today’s Direct Loan program, despite the role private lenders played in it.

Federal Family Education Loan Program

In Legislation

Federal Family Education Loan Program in the U.S. Code: Title 20, Chapter 28, Subchapter IV, Part B

The current, permanent, in-force federal laws regulating federal family education loan program are compiled in the United States Code under Title 20, Chapter 28, Subchapter IV, Part B. It constitutes “prima facie” evidence of statutes relating to Students (including federal family education loan program) of the United States. The reader can further narrow his/her legal research of the general topic (in this case, Student Assistance and Loans and Education of the US Code, including federal family education loan program) by chapter and subchapter.

Resources

Notes

• Jason D. Delisle, Private in Name Only: Lessons from the Defunct Guaranteed Student Loan Program, February 15, 2017, American Enterprise Institute
• Scott Jaschik, “Trump’s Emerging Higher Ed Platform,” Inside Higher Ed, May 13, 2016, insidehighered.com/news/2016/05/13/trumps-campaign-co-chair-describes-higher-education-policies-being-developed.
• Kimberly Hefling, “Meet the Congresswoman Poised to Tear Up Obama’s Education Legacy,” Politico, December 1, 2016, politico.com/story/2016/12/virginia-foxx-obama-education-legacy-232084.
• Republican National Convention, Republican Platform 2016, https://prod-static-ngop-pbl.s3.amazonaws.com/media/documents/DRAFT_12_FINAL%5b1%5d-ben_1468872234.pdf.
• James P. Bergeron, “Letter from National Council of Higher Education Resources to President-Elect Donald J. Trump,” December 7, 2016, static.politico.com/41/d9/c73e48744be0a1edfe4927f10c78/private-sector-seeks-greater-involvement-in-federal-student-loan-system-under-trump-administration.pdf.
• Ibid.