What Would the Ideal Federal Student Loan Program Look Like? ASA’s Vision
In 2006, when the Secretary of Education’s commission on higher education discussed simplifying the federal aid process, the idea gathered little momentum within the industry.
Yet in the interim, the financial aid community has seen its equilibrium upset by a host of unexpected events. In 2007, a scandal involving close and in some cases inappropriate relationships between lenders and schools cast doubt on the long-honored trust inherent in these connections. Most recently, a destabilized credit market has prompted lenders to leave the Federal Family Education Loan Program (FFELP), pick and choose among potential borrowers, or see their future involvement in the federal loan program as hazy and uncertain. Concurrently, a less rosy employment market and historic highs in consumer indebtedness have raised national awareness of the impact of student loan debt.
These bumps and knocks may not have left the federal loan program reeling, but they have certainly dented its air of imperviousness to change. And around the financial aid community, concerned participants are stepping back, envisioning a clean slate, and asking an important question:
What would the ideal federal student loan program look like?
ASA believes it has an answer.
In our vision of a federal student loan program that does justice to hardworking students, taxpayers, and committed school and lender partners, we see a system that is neutral, stable, and absorbs the strengths of both the FFEL and Direct Lending (DL) programs. This new, hybrid program would achieve increased effectiveness by:
- First and foremost, maximizing consumer rights and consumer choice over the life of the loan
- Harnessing competition to benefit the federal government and the consumer
- Gaining process efficiency through the use of one common operating system
- Striving to strike a balance between private and public capital
The Plan
The dislocation in the financial markets points out the very real need and advantage of having multiple sources of capital, both federal and private, involved in the student loan program. It also points out the very real need for a robust, neutral, single loan origination and delivery system that is disassociated with any individual lender or program. ASA proposes that the ideal system would have one common loan origination platform. Thus, instead of schools choosing either DL or FFELP, and then working with a handful of FFELP lenders based on the compatibility of their platforms, all schools would offer both DL and FFELP. Preferred lender lists would include the Department of Education (ED) plus several other lenders—putting true choice into students’ hands.
Also at issue is setting the interest rate provided to the private lenders/capital in the FFEL program. Congress sets the rate charged to the student, which is the same for both DL and FFEL. Historically, Congress has periodically set the subsidy rate (special allowance payment), but this has always politicized the process. If the private public–partnership underlying the student loan program is to endure, any future version of the program must employ a mechanism that provides a reasonable, risk-rated return for all participants. The details of this mechanism should be determined by the private sector. Capital markets, in conjunction with Congress, ED, and loan providers, should develop a proposal that uses the cost of the DL program as a benchmark; satisfies the needs of the federal government and the consumer; is market based; and provides an appropriate role for private capital and market competition.
The Implications
A key aspect of this new federal loan program would be to shift the emphasis away from a litmus test of federal cost to a balance of taxpayer costs and consumer rights and needs. Since education loans create a 10 to 25-year relationship between the borrower, the lender/servicer, and the federal government and encompass serious fiduciary and privacy obligations over the life of the loan, the education borrower becomes, in every sense, a “consumer” rather than just a recipient of these loans.
As an education loan consumer, the borrower’s needs for access to information, timely and responsive advice and service, and mediation of issues are real and critical to the program’s success. Education loan consumers also should have the right to pick whom they want to deal with over the next 10 to 25 years, whether it is the federal government, a guarantor, or a private lender.
Introducing this choice into this system—and putting it into the hands of borrowers—would elevate debt management programs and financial literacy education to the top priority for resources and attention in a competitive market.
What is your vision of the ideal federal student loan program? We’d like to hear your feedback on ASA’s plan and your thoughts on what change is needed in the financial aid industry.
Posted by Shelley Saunders on November 19, 2008 at 06:41 PM EST
Dear CJ,
Thank you for your comments. Unfortunately, you’re not alone in feeling overwhelmed by your student loan debt. The good news is that you do have some options.
First, in regard to borrower tax benefits: If you are not being claimed as a dependent on your parents’ tax return, and you are repaying your student loan, it is possible for you to deduct up to $2,500 of student loan interest you paid during a year. If you, your spouse, or a dependent are currently in school, you may claim a federal Lifetime Learning Tax Credit for qualified education expenses each year. Also, if your employer gives you money for education assistance, you can deduct up to $5,250 of that money, and in some cases more.
Second, you should know that in addition to the existing repayment plans, a new one has just gone into effect, called Income-Based Repayment. IBR is designed to benefit borrowers who have high student loan debt but lower salaries. After learning more about it, you may decide that IBR is the right choice for you.
Third, you should know that you aren’t the only voice calling for changes in the student loan system. Many higher education professionals have suggested providing federally subsidized benefits for borrowers based on their financial circumstances after college rather than on family resources before college, in effect providing the kind of assistance you may be seeking. And American Student Assistance, as you likely know, is advocating for comprehensive debt management services as a right for all borrowers, so that borrowers like you can receive counseling and personalized help in handling education debt after leaving school.
Remember, though, that any changes in the federal student loan program must be enacted by Congress before taking effect. Borrowers who want to see changes in the student loan system can always contact their Congressional representatives to make their opinions known.
Sincerely,
Shelley
Posted by Shelley Saunders on July 28, 2009 at 01:14 PM EST
The message from the Federal govt is: stay in school, get a degree. Job opportunities are greater for those with higher education. Agreed, which is why I went back to finish mine. However I see the debt piling up as I go and it's a little discouraging. The entrance counseling wants students and parents to be very aware of how much debt they are racking up and that's great, but what other choices are there for financing a college education? If I had the money to pay for it up front the the point would be moot. I see the debt mounting but really have no other choice but to keep borrowing in order to get my degree. How about a little help after graduation like an income tax break up to the amount of the education debt? I don't mean a few hundred dollar deduction—I mean full exemption up to the total amount of loans owed. It's the least the country/government/society could do to support those that value education as a means to being a more productive citizen.
Posted by cj on July 23, 2009 at 06:43 PM EST
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Blog Author
Shelley Saunders
Vice President, Strategic Services
Biography
In her current role as American Student Assistance’s vice president of Strategic Services, Shelley Saunders serves as the organization’s primary contact for Congress, as well as for national organizations such as the American Council on Education, the American Association for State Colleges and Universities, the National Association of Student Loan Administrators (NASLA), and others. Her main focus is to educate the public policy making community on the positive results American Student Assistance has realized through its focus on student loan borrower financial Wellness.
In her 12-year career at American Student Assistance, Saunders has played an integral role in several of the organization’s global projects, including designing a new client-server based life-of-the-loan processing system and developing corporate strategy and tactics. She most recently held the position of vice president of Borrower Services.
Saunders has appeared on numerous Clear Channel radio broadcasts in the Washington, D.C. area. Her areas of expertise include the public purpose role of federal student loan administrators, as well as general facts about student loan origination and repayment.
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