Accountability in Federal Student Loan Policy Formation

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Accountability in Federal Student Loan Policy
Formation
Parent Loans
FFELP
????
Direct Loans
Perkins
22nd Annual Financial Aid Research Network
Conference June 9, 2005
Dr. Joe L. McCormick KHEAA/KHESLC
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Federal Student Loan PolicyA Proposed Study

• How can the political process improve making
  responsible federal student loan policy?
• Is it time for a new paradigm in federal student
  loan delivery?
• What new directions and approaches might be
  explored?
• Is it truly in the best interests of students and
  taxpayers to continue three federal student loan
  programs?
• Are there ways to form a partnership between the
  private sector and the public sector to truly
  provide the most effective and lowest cost
  federal loans to students and the American
  taxpayer?

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Federal Student Loans From 1958 to Now

• 1958 to 1965 National Defense Education Act
• 100 million appropriation in first year
• restricted to science and math students
• 1965 to 1992 Guaranteed Student Loan Program
• phenomenal growth
• multiple players
• complex systems
• 1993 to Present FFELP, Direct Loan Program, and
  Perkins Student Loan Program

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Federal Student Loan PolicyNow

• ED supports FFELP and Direct Loan Program equally
• Continued funding for Perkins Student Loans
• Movement toward new technology for delivery
• Master P-Note
• Electronic Signature
• Common Origination (ELM)
• Reduced loan fees (vary depending on lender)
• Borrower benefits (vary depending on lender)
• Lowest overall interest rates in programs history

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Federal Student Loan Policy Now

• Federal student loan policy has moved from
  limited access to total access to student loans.
• Loans, not grants, are the primary vehicle for
  providing postsecondary educational
  opportunities.
• Federal student loan policy is driven by
  costs/budget deficits, not necessarily program
  improvements.
• Vast majority of FFELP loans are provided by less
  than 100 lenders.
• Number of guarantors and secondary markets has
  diminished somewhat over the past several years.

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Federal Student Loan PolicyWhere are We Going?

• 2005 Reauthorization Issues
• FFELP versus Direct Loans? Which is less costly
  to the taxpayer? Should there be both?
• Continue or discontinue Perkins?
• Curb excessive yield payments to FFELP lenders?
• School as lender?
• Future role of FFELP guarantors?
• Consolidation interest rates (fixed or variable
  or both)?
• Retain or abolish the single holder rule?
• Incentive payments of Pell funding to encourage
  schools into Direct Loans?
• Will reauthorization occur this year?

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For Just a Moment

• Stop !!!!!
• Take a deep breath.
• Clear your mind of what you now know about
  student loans!
• Lets look beyond reauthorizations 2005 and 2010
  and imagine the possibilities!
• BE IN THE QUESTION!
• TAKE CHANCES! GET MESSY!

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Why?

• Why are there interstate highways in Hawaii?
• If we know the speed of light, why dont we know
  the speed of dark?
• Why do we park our cars in a driveway and drive
  our cars on a parkway?
• Why is it that to stop Windows 2000, you have to
  click on the Start button?
• Why is a boxing ring square?
• If love is blind, why is lingerie so popular?

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In Federal Student Loan Policy, Why Do We

• Need 106 questions on the FAFSA to determine a
  fourth-generation welfare student is eligible for
  in-school interest benefits?
• Assume the same fourth-generation poor student
  will suddenly get rich while in school, so we
  make him fill out a FAFSA every year he is in
  college?
• Require schools to certify loans to guarantee
  agencies, when they no longer guarantee loans?
• Have default rates with punitive damages for
  schools and students but not for lenders?
• Deny DL students a choice of lender while FFELP
  students are, by regulation, required to choose
  their lender?
• Not allow students in both FFELP and DL to enjoy
  the same loan provisions and borrower benefits,
  when both programs are federal Title IV loan
  programs?
• Require DL schools, which are not financial
  institutions, to originate and disburse all DL
  loans and be fully responsible for all
  reconciliation?
• Have cohort default rates at all? Why not have
  incentives to encourage students to make timely
  repayment of loans and focus on the performing
  and nonperforming aspects of the loan itself?
• Pay all lenders the same rate for their loan
  participation regardless of the quality of their
  servicing of the loan portfolio?

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Federal Student Loan Policy Myths

• FFELP is viewed as a private sector approach to
  loan delivery, and Direct Lending is viewed as a
  public sector approach. They are both public
  sector approaches to the delivery of student loan
  capital.
• Guarantee agencies guarantee loans.
• Continuation of both FFELP and Direct Loans is
  good for schools and students competition
  between programs is the best way to insure total
  access to student loan capital and quality
  service in the years to come.
• Sufficient incentives are imbedded in the FFELP
  and Direct Loans to insure quality servicing of
  student loans.
• School cohort default rates are an important
  measure of how schools are doing in the FFELP and
  Direct Loan programs.
• Further cuts in lender subsidies will threaten
  student loan access.
• Current due diligence regulations encourage
  timely repayment of student loans.
• Needy students receive the most subsidy in the
  FFELP and Direct Loan programs.

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The Future of Federal Student Loans Should There
Be a New ParadigmBeyond Direct Loans?

• Absolutely!
• Current Federal Loan System is too
• Costly
• Complex
• Cumbersome
• Inflexible
• Overregulated
• Multifaceted

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Ideal Loan System Would

• Serve intended populations.
• Provide uniform benefits to borrowers.
• Maximize incentives for repayment.
• Reward public service.
• Provide public subsidy for those most in need
  who
• ultimately cannot pay.
• Have performance-based due diligence for
• program compliance.

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Think of a Student Loan As

• A social investment in human capital, not just
  another student financial aid program.
• Personal investment in ones future quality of
  life and lifelong learning needs.
• A surrender of future earnings, more than money
  to go to college. Educational loan choices in
  the present represent a denial of economic
  choices in the future.
• An asset, either a performing asset or a
  non-performing asset (not just a default!).
• Subsidies paid for circumstances in the future,
  not past or present circumstances.

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Student Loans In the 21st Century

• In the 1990s, schools drove the student loan
  process.
• In the 21st century, students will drive the
  student loan process via the Internet and
  advances in technology.

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Lets Be Bold, Outrageous Create Lifelong
Learning Accounts

• At birth, issue SS card and a lifelong learning
  account for postsecondary education
  opportunities.
• Parents contribute to the learning account as an
  IRA for college.
• As student gets older and works, a set percentage
  of earnings is deposited in his/her learning
  account for college expenses.
• As college expenses are incurred, the learning
  account is used to pay eligible expenses with
  authorization to draw into negative balance.
• Students earnings continue to be assessed a
  fixed percentage to be transferred to his/her
  learning account to offset negative balances and
  build positive balances for future education
  expenses.
• Elderly student may pass any positive balance on
  to his/her children. At age 65, accounts with a
  negative balance would be written off.

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The Lifelong Learning Account of Tomorrow

• No in-school interest subsidy.
• Only one federal loan program.
• Market conditions determine interest rates, not
  the political process.
• A standard federal guarantee attached to the
  FAFSA for whatever amounts the student may be
  eligible to receive under Title IV.
• Void of defaults altogether!

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The Lifelong Learning Account of Tomorrow

• Paperless delivery of loan funds.
• Administratively burden-free processes for
  schools and student borrowers.
• Maximum use of technology and Internet.
• Flexible repayment options with emphasis on
  electronic means of payment.
• Minimal student status reporting requirements.
• No borrower origination or guarantee fees!

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The Lifelong Learning Account of Tomorrow

• No more annual loan limits, instead students
  would draw on the lifelong learning account
  similar to exercising a line of credit.
• Generous loan forgiveness provisions to target
  areas of critical need for public service.
• Payroll deductions preferred method of repayment.
• No more complex, cumbersome deferments and
  forbearances.
• A common loan origination process.

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The Lifelong Learning Account Is Not New a New
Idea

• 1968 Milton Friedman declared the student loan
  was an investment in the future and should not
  be
• designed as an installment loan, but
  rather an
• income contingent loan!
• 1972 New Patterns for College Lending Income
• Contingent Loans (A Proposal by D.
  Bruce
• Johnstone)

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Federal Student Loan Policy for the 21st Century
Should be about students and what works best
for them and their postsecondary educational
pursuits.
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Remember?The Student Is

• the most important person on the campus.
  Without
• students, there would be no need for the
  university.
  
  
  
  
• not a cold enrollment statistic, but a flesh and
  blood human
• being with feelings and emotions like our own.
  
• not someone to be tolerated so that we can do
  our
• thing. They are our thing.
• not dependent on us, rather we are dependent on
  them.
  
  
  
  
• not an interruption of our work, but the purpose
  of it. We
• are not doing them a favor by serving them.
  They are doing
• us a favor by giving us the opportunity to
  serve them!