Continuing the Conversation: A New Loan Model
May 6, 2009 4:04 pm LoansOne aspect of NASFAA’s NCI preliminary recommendations is a new approach to student loans that would replace the Federal Family Education Loan Program, the Direct Loan Program, and the Federal Perkins Loan Program with a program that integrates the best aspects of all three. This new loan program would incorporate current FFELP participants to ensure a high level of customer service and maintain valuable borrower services like financial education and default prevention.
This new, integrated loan program would be simpler and more equitable for students while expanding the amount of capital available to make loans through the capital markets. The proposed loan model also encourages all beneficiaries of postsecondary education (i.e., borrowers, state governments, private employers, friends and families, and all Americans) to help pay down borrowers’ debt levels and raise capital for a self-sustaining loan fund.
NASFAA has been receiving questions from members about the proposed loan model and has posted some common questions and answers. We will continue to post answers to common questions as we receive them.
The proposed loan program would:
- Subsidize student loan borrowers during repayment - instead of while they are in school
- Decrease student loan burden by strengthening the Income-Based Repayment program so students never pay more than 10 percent of their discretionary income and loans are forgiven after 20 years of repayment.
- Provide consistent and equal terms, conditions, and benefits to all borrowers
- Offer a seamless loan origination, disbursement and repayment experience for students
- Ensure a predictable and continuous source of capital for student loan funding that isn’t dependent on any single entity
- Reduce federal expenditures by creating a self-sustaining funding source that relies on new, safe investment vehicles
- Leverage technological and business innovations in the private sector by creating a common servicing platform that relies on a centralized database of all borrowers and can be used by multiple servicing agents
- Creates new incentives for businesses, individuals, and states to help students repay student loan debt
- Capitalizes on the expertise and best practices developed by all entities currently participating in the existing loan programs
- Is not the FFEL, Direct Loan, or Perkins Loan program, but rather an entirely new loan program created from the most positive aspects of all three
We are curious about what you think of NASFAA’s proposed loan model, so please post any comments, questions or concerns you have about the proposal.
May 8th, 2009 at 8:48 am
I am particularly concerned about in-school subsidies. When we hold increasing access to college as a goal, we are frequently referring to part-time students who work full time. Their tuition is not subsidized by full time rate structures, their living expenses are at least equal to full time students, and they are often in school for many years. Many have family responsibilities.
Failing to subsidize their in-school periods puts an undue burden on this population.
May 8th, 2009 at 1:53 pm
“Decrease student loan burden by strengthening the Income-Based Repayment program so students never pay more than 10 percent of their discretionary income and loans are forgiven after 20 years of repayment.”
While I applaud the development that would prevent students from becoming life-time indentured servants to their student loans, as a tax payer I am concerned that there would be no incentive for the student to be responsible in borrowing - to correlate debt to realistic earnings potential.
May 8th, 2009 at 2:00 pm
Although I think your model is tremendously flawed, it raises this issue that we’re witnessing some of the greatest potential changes to federal student loans ever. DL is only an easy solution because it has fewer parts. DL offers no choice, incentive to innovate or excel, or need to “care” about a borrower. It’s simply a loan, nothing more. FFELP needed to evolve as well, too many parts and a victim of it’s own willingness to customize for individual school needs. This process is moving too fast. Tell everyone to slow down and develop a program that works, both short term and long term. There are too many resources that are going to be thrown away if the administration is able to FORCE Direct Lending on all schools. Reach out to your congressional delagates and tell them to slow down and get it right!
May 8th, 2009 at 5:10 pm
Part of the proposal is to provide a much lower interest rate of 3.4% which might provide savings to students even with an unsubsidized loan structure.
May 11th, 2009 at 7:19 am
I don’t see how this is better than President Obama’s proposal. What does this gain us except to continue to keep profits in lending for lenders? It seems that the only thing keeping most lenders in FFEL is the ECASLA money, which will be gone in a year.
Additionally, since cohort default rates are lower in DL, what exactly are the best practices from the lenders?
NASFAA, instead of creating a plan to protect the middlemen in the process, I urge you to back the current policy.
May 17th, 2009 at 10:13 am
We have a historical chance to increase Pell, make it an entitlement through mandatory spending and provide funding increases to keep up with inflation. If we don’t take advantage of this opportunity, it may never come again.
NASFAA’s model is not any different than Obama’s except that it will not save as much money because it carves our subsidies for lenders.
How should we judge the program? I think we should judge it by which program puts the most money in the hands of the neediest students.
July 7th, 2009 at 10:06 am
I would love to see the loan model be taken even further. Require that banks set up a “college savings account” for disbursements directly from the USDE to the student. Students would receive their funds electronically after USDE receives enrollment and SAP files from the colleges. Also, REQUIRE that the lenders provide consumer counseling throughout the college career of the student and FREE financial planning upon graduation and throughout the first year of repayment. Take the opportunity to turn the college loan into part of the student’s education and produce more learned graduates to become responsible consumers and citizens.