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A Project of The Annenberg Public Policy Center

Student Loan Stretching

Arkansas Rep. Tom Cotton mischaracterizes the Affordable Care Act’s impact on student loans, and a teachers union stretches Cotton’s voting record on the issue.

Cotton says the ACA “nationalized the student loan industry” and implied students can’t get private loans from their local banks anymore. Not exactly. Plenty of banks offer private education loans, and the federal student loan program always has been a government program.

Before the ACA, about half of federal student loans originated with private lenders while being guaranteed by the government. Now, the government is both the lender and the guarantor. The move saves $61 billion over 10 years, according to the Congressional Budget Office.

An ad from the National Education Association Advocacy Fund attacks Cotton on this topic, saying that he “voted to end low-interest student loans.” He didn’t. The vote in question was on a Republican budget that called for ending federal subsidies for need-based Stafford loans. The subsidies cover the cost of interest payments while students are in school. The Republican budget didn’t call for ending the loan program, which includes unsubsidized Stafford loans at the same interest rate.

Nationalizing a Federal Program

At the Oct. 14 Arkansas Senate debate with Sen. Mark Pryor, Cotton mischaracterized the changes made to the federal student loan program by the reconciliation bill, which was part of the Affordable Care Act. He claimed the health care law “nationalized the student loan industry,” and made it so that students couldn’t have a mix of federal and private loans, as he did when he was a college student. He said the law “took that choice away from you so the bank where you have a checking account can’t help initiate a loan for you.”

Let’s start with the claim that the ACA “nationalized the student loan industry.” The federal government got into the student loan business with the passage of the Higher Education Act in 1965. The loan provisions of the law were designed to, according to a Congressional Research Service report, “enhance access to postsecondary education for students from low- and middle-income families by providing them access to low-interest student loans.”

First came the Federal Family Education Loan (FFEL) program, in which loans originated with the private sector but were backed (guaranteed against default or in cases of death) by the federal government and offered at rates lower than the banks would normally give. In 1993, a direct loan program was created by separate legislation “with the goals of streamlining the student loan delivery system and achieving cost savings,” says CRS. That program, where the government directly lends the money, was supposed to gradually replace the FFEL program, but that plan was later nullified by subsequent legislation.

Colleges and universities chose which program they’d like to use, and students would get information on applying for a loan — specifically a Stafford loan for students or a PLUS loan for parents of dependent students — through college financial aid offices. From students’ perspective, for the most part, they “didn’t even recognize there were these two different programs working in tandem,” Beth Akers, a fellow in the Brookings Institution’s Brown Center on Education Policy, told us. The difference was who sent a check to the school, and who sent students a bill once they graduated. Even then, loans originating with the government could be serviced by private banks, meaning the bills still came from the banks.

In 2010, the year the Affordable Care Act was enacted, CBO estimated that 55 percent of federal student loans originated with banks (what are called “guaranteed loans”), with the rest originating with the government as “direct loans.”

The share of bank-originated federal loans had been declining — it was 81 percent in 2008. The reasons were the financial crisis, which increased private lenders’ costs and led the Department of Education to buy new loans that had originated with private lenders. Uncertainty about the banks’ participation caused more schools to switch to the direct loan program. CBO estimated this decline would continue, with the guaranteed, or bank-originated, loans making up 40 percent of new federal loans in 2013.

But the ACA changed the program, making all new federal student loans direct loans. Specifically, the Student Aid and Fiscal Responsibility Act, which passed the House by a vote of 253 to 171 in September 2009, was rolled into the reconciliation bill, which Democrats used to pass the health care law without risk of a filibuster. Under the student aid provisions, the government would cut out the middle-man — the private lenders, such as Sallie Mae — and all new loans would be direct ones from the government. CBO estimated the move would save taxpayers $61 billion over 10 years. More than half of that amount would go to the Pell Grant program for low-income students.

CBO’s report on the loan programs said that the FFEL program (in which banks originated the federal loans) was “significantly more costly for the federal budget.” Why? Mainly because payments to the lenders were set, by legislation, at a higher average amount than the cost of the direct loans, with the additional payment covering “the higher marketing and funding costs of the guaranteed loan program and the higher level of services that it offers to schools and students.” In other words, it’s cheaper for the government to lend the money directly instead of paying banks to do so.

The government still contracts with private banks to service student loans — meaning students may still send their payments to private banks — but banks no longer originate the loans. Cotton may oppose that change, but it’s misleading to say the ACA “nationalized” a student loan program that was a federal program in the first place.

As for students not being able to choose to get a private loan at “the bank where you have a checking account,” as Cotton said, that’s not accurate, either. Private banks offer student education loans, just as they did before the ACA.

And even under the pre-ACA federal program, students weren’t the ones who could choose whether their Stafford loans originated with a bank or the government — that choice was up to colleges and universities. A student couldn’t get a federal loan through his local bank unless the bank was part of the federal program and worked with the college or university in question. Akers says the banks, in the past, couldn’t discriminate against the student, but they could say they’d only lend to those attending certain institutions.

PNC Bank provides a chart on the differences between federal and private student loans. Students can borrow larger amounts privately, but need to have a credit check and likely a co-signer (neither are required for Stafford loans). The fixed interest rate is lower for the federal loan as well, though a variable-rate loan could dip below the Stafford’s current 4.66 percent fixed rate.

With subsidized Stafford loans, available based on income, the government covers the interest on the loan while a student is still in school and during any hardship deferment periods.

Cotton Wants to ‘End’ Low-Interest Loans?

The National Education Association Advocacy Fund launched an ad on Oct. 14 featuring Arkansas teacher Ashley Pledger saying, “Tom Cotton got federal student loans to help pay for his Harvard education, but now Cotton wants to end those same student aid programs. Tom Cotton would deprive Arkansas students the opportunities that helped him.”

On screen are the words, “Tom Cotton voted to end low-interest student loans.”

But the March 2013 vote cited — in favor of the Republican Study Committee budget resolution — wouldn’t have ended low-interest student loans. Instead, it called for ending subsidized Stafford loans, which are available to undergraduates to cover interest payments while they are in school. The proposal didn’t call for eliminating all Stafford loans (a little more than half are unsubsidized, says CBO) or PLUS loans the government provides for parents of undergraduate dependents. The RSC budget failed.

Cotton has said he had Stafford loans and private loans to help pay for his Harvard education. We don’t know whether Cotton received subsidized or unsubsidized Stafford loans. But either way, his vote wasn’t to “end low-interest student loans,” as all types of Stafford loans have the same interest rate.

In July last year, Cotton also voted against the Bipartisan Student Loan Certainty Act of 2013, a measure that reversed a doubling of student loan interest rates and changed the rate-setting system from one legislated by Congress to one tied to the market and capped. He was one of only six Republican House members to vote against the bill, which passed the House on a 392-31 vote and the Senate on an 81-18 vote.

The NEA ad doesn’t cite that vote, which could certainly be called a vote against lowering student loan interest rates. But it still wouldn’t be a vote to “end low-interest student loans,” nor would it be a vote to “end those same student aid programs” that benefited Cotton.

At the time of the vote on interest rates, Cotton said he favored “ending the federal-government monopoly on the student-lending business” and having “hometown banks work with students and families to finance higher education.”

Cotton, Aug. 1, 2013: A better path is to repeal Obamacare, which nationalized the student-loan business, and let Arkansas’s hometown banks work with students and families to finance higher education, just as they do with homes, farms, businesses, and other loans. I’m committed to bringing affordable higher education to every Arkansan and ending the federal-government monopoly on the student-lending business.

It’s unclear exactly what Cotton proposes for the federal student loan program. But if the Affordable Care Act were repealed, then the student loan program could go back to the days before the ACA, when about half of federal student loans originated with private banks and the other half with the federal government. However, that wouldn’t end the “federal-government monopoly” on student loans. The federal student loan program already had provided the vast majority of student education lending.

CBO’s 2010 report on the program said there wasn’t good data on the size of the private student loan market, but that one estimate showed the dollar value of such lending was about one-quarter the size of the federal lending program in 2007-2008. For fiscal year 2007, the federal loan program included $64.4 billion in lending for 14.3 million new loans. (For fiscal 2014, the Department of Education estimates new lending under the federal loan program would total $112.1 billion for 21.9 million loans.)

At the Oct. 14 debate, Cotton said, “I don’t want to eliminate the student loan program,” but that he wanted local banks to compete. He didn’t elaborate. We asked Cotton’s campaign for clarification and details on what Cotton supported in terms of the federal student loan program. We have not yet received a response.

The Brookings Institution’s Akers laid out for us the general arguments for and against having private banks originate the federal loans or having the government do so: Having the private sector involved could lead to efficiencies that come with competition for government grants or students’ business, but could be less stable, as happened during the 2008 financial crises. With the direct federal loans, that competition is eliminated but the stability, and potentially cost savings, is gained.

How best to structure and operate the federal student loan program would make for an interesting policy debate, but as often happens in political campaigns, voters in Arkansas are left instead with exaggerations and misrepresentations of the facts.

— Lori Robertson