Evolution over Elimination: Guarantors Needed to Provide Neutral Support to Borrowers

Reform is in the air for federal student lending. President Obama’s budget has landed in Congress’s hands, and with it comes a proposal to cease all new loan origination via the Federal Family Education Loan Program (FFELP). Proponents of this plan suggest it will save money for taxpayers, so that additional federal funds can be put toward Pell Grants. Yet it could also eliminate vital support for student loan borrowers.

It’s time to step back and take a true long-term look at our federal student aid policy, rather than taking a piecemeal approach. We must build a new program that balances cheaper costs for taxpayers with the pressing needs of student loan borrowers today—namely, their need to manage the debt that comes with U.S. higher education in the 21^st century.

Americans are taking on greater amounts of debt than ever to fund their educations: In each year between 2000 – 01 and 2006 – 07, an estimated 60% of bachelor’s degree recipients borrowed to fund their educations, and the average debt per borrower rose 18%, from $19,300 to $22,700 in 2007 dollars, according to the College Board. Even with an increase in federal funding, the maximum Pell Grant award will still fall short of the full cost of tuition and fees for the average student.

And recently released statistics from the Department of Education show that the rate of students defaulting on their student loans has risen from 5.2% to 6.9%, year-over-year. So if public policy determines that most students will incur loan debt, and more student loan borrowers are becoming vulnerable to default during hard economic times, then it must naturally follow that all U.S. student loan consumers, regardless of the source of loan capital, are entitled to comprehensive support as they navigate the loan process from application to the last payment.

Guarantors are ideally suited to fill this glaring hole in the federal student loan program—neutral, third-party providers of support for borrowers over the life of the loan, and uncomplicated by any ownership in the loan. The primary role of the “guarantor” should move from insuring the lenders and acting as a default collector to instead guaranteeing that all borrowers, regardless of the source of loan capital, receive the comprehensive education debt management services to which they are entitled from the government.

In their evolved role, guarantors would continue to provide information to student loan consumers in the community; provide early awareness, financial literacy, and personalized debt counseling to avert default; and work with defaulted borrowers toward rehabilitation. In addition, guarantors could still be involved in the default claim process—but from the borrowers’ perspective, to ensure the claims are valid and that borrowers receive all of their rights as set forth by federal regulations.

The bottom line is this: No matter where their loans come from, federal student loan borrowers need support services from an independent agency. Guarantors already work closely with schools, lenders, and the Department of Education. We have extensive knowledge of the intricacies of the federal student loan system. We have significant partnerships with college planning professionals at the state level. We also have years of experience working in the trenches with borrowers, as well as proven results (pdf, 810 KB) in positively impacting repayment.

To limit the role of the guarantor to just “guaranteeing” is to take a very narrow view of our capabilities and value. It’s a cliché, but it applies: Don’t throw the baby out with the bath water. Let’s evolve, not eliminate.

Posted by Shelley Saunders on May 01, 2009 at 09:42 AM EST

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