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Interviews and Opinions
10/4/07 INTERVIEW WITH DAVID D. MOHNING, DIRECTOR OF STUDENT FINANCIAL AID, VANDERBILT UNIVERSITY
This story first appeared in the September 25 issue of Student Lending.
By Maria Koklanaris
Since July of 1991, David D. Mohning has served as the Director of Student Financial Aid at Vanderbilt University, where he also holds an appointment as Assistant Professor for the Practice of Education. As the head of the Office of Student Financial Aid, he oversees the administration of about $208 million in funds going to about 3,980 undergraduates and 2,095 graduate and professional students (2006-07).
While serving as Director of Student Financial Aid at Vanderbilt, he has also held additional concurrent appointments as the Acting Dean of Undergraduate Admissions in 1997-98 and as Director of Student Accounts/Student Loans in 1998-2000. Before 1991, he served about 20 years in a number of progressively responsible positions in the Office of Student Financial Aid at Miami University in Oxford, Ohio. He was its director from 1980 to 1991. Prior to his time at Miami University, he served as a Navy Officer aboard an aircraft carrier. Mohning recently spoke with HEWI about new legislation that would authorize the Department of Education to hold pilot auctions for PLUS loans.
As you know, the College Cost Reduction and Access Act of 2007, including a provision for student loan auctions that was first proposed by the Senate, is now a reality. Can you comment on how such auctions would be carried out?
The legislation requires the Secretary of Education to implement a student loan auction program, to begin in 2009, for all eligible Parent PLUS Loans. It includes what I anticipate will be a fairly complicated implementation structure, with bids being taken for lenders to ultimately be identified - two lenders per state - for the authority to make those loans in each state. It starts with and basically forces an auction process on all of these loan program participants without any initial/preliminary trial and accompanying evaluation or study first occurring. I do not believe that is a reasonable or systematic and studied approach to making such a significant change in a very major financial aid program area.
An auction approach was implemented some years ago in the HEAL (Health Education Assistance Loan) Program, but it was subsequently discontinued. I think that piece of history gives all of us a fairly strong message to which we should pay particular attention as the next auction implementation is considered. I personally don’t recall very many (if any) positive things about the HEAL Program auction process.
As a longtime financial aid administrator and a professor who has closely studied this issue, what basis do you see for making this change?
I do not believe that there is any real/proven evidence of a need for change. The report (GAO-02-84SP) titled "Alternative Market Mechanisms for the Student Loan Program" that was issued by the U.S. Department of Education and the U.S. General Accounting Office reflects the work of a diverse task force (of which I was a member) that looked extensively at various possible loan auction options.
That report was issued in December of 2001 without recommending changes in the form of moving to any Federal Family Education Loan (FFEL) Program auction approach. For example, chapter 3, page 32, of that report includes the following statement with regard to an auction approach: "The effects of auctions on borrower interest rates, the distribution of federal payments to lenders, the quality of service, and the burden on borrowers and schools are uncertain." Given that expressed uncertainty, which I believe still exists today, I'm not convinced that there is a need for change in the form of moving to an auction approach, something that the task force could not document or support in 2001.
The House also had a plan for an auction, but it was removed from the bill in favor of the Senate version. Can you elaborate on some differences between the two?
The House bill called for an initial planning study to be undertaken and then followed by a two-year pilot program auction (no more than 10% and 20%, respectively, of annual loan volume in each of those two years) of Federal Family Education Loan (FFEL) Program originations. It also authorized the Secretary of education to then transition to a total auction system if he/she so chose after that two-year pilot auction period. That transition could have been accomplished potentially without regard to the outcome of the auction planning study, without regard to the results of the two-year pilot auction, and without regard to any additional input/action from Congress. That approach presented an issue with which many people, including some members of Congress, were very uncomfortable and with which there was fairly strong disagreement. While the proposed House legislation did call for an evaluation of the partial auctions offered as pilot programs, it still allowed for full implementation of the auction approach to be accomplished without specific regard to or having to take account of the results/outcome of that independent evaluation that was to have been conducted by the Government Accountability Office and without full implementation decision(s) being reviewed or evaluated by Congress.
What affect do you think an auction will have on students and parents?
The compromise legislation contains language that will ultimately result in lenders being identified who can make loans only by virtue of “winning” the auction process or, if there are no auction “winners” in a state, being appointed by the Secretary of Education as a lender of last resort. This means that students and/or parents would thus lose their right to choose their lender, except for being able to choose from only those lenders presumably identified in each state by the U.S. Department of Education via the auction/appointment process in the first place. I don't see that loss of choice as necessarily being positive.
I basically agree with the assessment of a group of bipartisan members of Congress who went on record in a letter dated 7-30-07 sent to key leaders of the committees in both Houses of Congress that were dealing most directly with the auction legislation. Those members signed a letter that included the following statements: "At the outset of an auction, multiple bidders could temporarily drive down government costs by eliminating value-added benefits and services which would result in a bare-bones student loan program. This will push many lenders out of the program and hurt students. Eventually, because very few providers would be left in the program, the remaining participants would no longer have an incentive to provide meaningful student services. With a low supply of providers, and a high demand for loans, market forces would actually reduce the services to students, increase the rates of default, and eventually drive up government costs."
I also agree with statements made in a letter dated August 3 from Secretary of Education Margaret Spellings. She said, “I strongly believe that we must proceed with great caution in entering the student auction arena. The auction provisions in both the House and Senate versions of H.R. 2669 would involve enormous implementation challenges that threaten to disrupt services and loan availability to students.”
Finally, an auction approach could shift the balance of competition in the student loan market place more toward price competition that would most likely be achieved at the expense of service competition. Presently, lenders compete on the basis of price by offering various "discounts" in the form, for example, of loan fees being paid on behalf of the borrower (front end benefits) and/or in the form of reduced interest and other benefits that are offered to borrowers during repayment (back end benefits). Lenders also compete on the basis of service and/or other value-added benefits offered to their borrowers and to schools. I believe that an auction approach would force lenders to shift their emphasis mostly toward price since the major criterion for determining auction winners would be the lowest price or Special Allowance Payment rate bid by those competing lenders. It is highly likely, then, that lenders could find themselves in a position of feeling a need to focus less of their resources and attention on service and/or offering fewer value-added services than is currently the case. In addition, I believe that some lenders would be driven out or decide not to participate in the program any longer, and I believe that those who stayed and competed for business via an auction would be forced to reduce the front end and back end benefits offered to their borrowers in order to position themselves to present a competitive auction bid. This means that borrowers could ultimately be impacted, because some of the benefits, in terms of both products and services, that are currently offered by lenders could be reduced or eliminated, ultimately leading to an increase in the resultant cost to borrowers.
Certainly, financial aid offices dealing with the pilot auction will have to make some changes. Can you elaborate on this?
Implementation of any auction approach/structure is (I believe) going to possess some amount of inherent confusion and frustration for all parties involved, including the U.S. Department of Education (as expressed by the Secretary of Education in her letter/statement that I previously referenced), schools, lenders, servicing entities, guarantors, borrowers, etc. Recent history associated with implementing the Academic Competitiveness Grant (ACG) and the Science and Math Access to Retain Talent (SMART) Grant Programs, for example, has shown that implementation of new federal programs plus all of the requisite processing associated with those programs is NOT easy and NOT accomplished without significant levels of frustration and confusion (and that's putting it mildly). I believe that implementing and administering a loan auction program would also present many, and probably huge, new challenges.
Also, an auction approach held on some regular basis (every two years) could lead to new/different lenders being identified after each auction is held. Those new lenders would have to then be utilized by all new borrowers at a particular school, in a particular state, or in some other designated borrower grouping. That could lead to schools having to work with newly-designated lenders on a regular basis, something that could require systems, technology, guarantor, and any number of changes and other new "relationships" needing to be identified and implemented after each time that an auction was held. I can see this potentially causing confusion and creating a challenging situation for everyone and all parties involved. Adapting to all of those requisite changes is something that I do not necessarily believe would lead to satisfied borrowers, lenders, school personnel, lender representatives, guarantor representatives, etc. I also believe it would cost schools and lenders both time and resources that all will most likely equate to a significant amount of money.
While it is no secret that the student lending community strongly dislikes the auction idea and lobbied to have Congress study the issue further before moving to a pilot program, what are some of the things that you see about an auction that could affect the lending community in an overall sense?
Any palatable aspects of the auction proposal, particularly in light of and in addition to what I have heard referred to as the recent "credit challenges” and “dislocation” in the financial markets, could be exacerbated due to the uncertainty caused for the lenders relative to their willingness to participate, and to what extent, in an auction process. These kinds of market dynamics will affect (increase) lenders' financing costs, in turn impacting those lenders' ability to acquire new capital at a level and cost that will allow them to put forth a low bid that translates into an offer of any "savings" to potential future borrowers through an auction bid that would be submitted. As a result, competition could actually wane and the desires of lenders to participate in an auction could potentially decrease/disappear. I don’t know for sure what end result those things could bring, but I don't see it being necessarily positive.
Also, an auction approach could very well affect the diversity of the lenders who participate in this FFEL Program option. Larger lenders could potentially have advantages over smaller lenders in a loan auction approach because larger lenders would probably be able to obtain loan funds more cheaply and spread their overall/overhead loan costs over a larger base of loans, or a base of loan plus non-loan products, thus enabling them to potentially outbid smaller lenders/competitors. Another factor is that non-profit lenders could potentially have some advantage over for-profit lenders due to their tax status/benefits, not paying stock dividends, etc. (non-profit loan providers that utilize tax-exempt funding are limited to earnings not to exceed 2 percent, however, and any excess over that 2 percent must be used for student benefit programs or returned to the federal government). I do not see the potential loss of lender participation, decrease in lender competition, and decrease in lender diversity among the remaining participants as being positive.
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Copyright 2007. Higher Education Washington, Inc.
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