The Future of Student Lending:
Should There Be a New Paradigm
Beyond Direct Loans???
Parent Loans
FFELP
????
Perkins
Direct
Loans
WASFAA
April 2009
Dr. Joe L. McCormick
KentuckyCAN, Inc. 1
Federal Student Loans:
A Brief History
• 1958 to 1965 National Defense Education Act
(Perkins Loans)
– $100 million appropriation in first year
– Restricted to science and math students
• 1965 to 1992 Guaranteed Student Loan Program
(FFELP)
– Phenomenal growth
– Multiple players (over 8,000 lenders in mid ’80s)
– Complex systems
• 1993 to Present: FFELP, Direct Loan Program, and
Perkins Student Loan Program
2
Three Major Federal Loan Programs:
Why Direct Loans Came to be?
• Increased Pressure in Congress to achieve
budget savings and the
• Credit Reform Act of 1990
– Federal government went from a “cash” basis of
scoring the cost of debt to an “accrual” basis
– Under a cash basis of accounting, DL is more costly
than FFELP; under an accrual basis, DL is cheaper
than FFELP
3
Three Major Federal Loan Programs:
Why Direct Loans Came to be?
• Attempt by Clinton Administration to
replace FFELP with Direct Loan
Program on a five-year schedule
• Reconciliation Act of 1993 – made the DL
program an “entitlement” program as
outlined in Section 452(b) of the HEA
4
Major Distinctions in FFELP &
Direct Loans
• FFELP
– Loan availability is
conditional, not required
– CBO scores FFELP as a
cost only to federal
government
– Multiple loan origination
systems
– Income sensitive
repayment option
• Direct Loans
– Loan availability is
mandatory & required in
statute
– CBO scores both a cost & a
revenue to DL
– Single source for loans
– Income-contingent
repayment option
5
Federal Student Loans Today
• FFELP financing in turmoil
• Access to private loans increasingly restricted
• Reduction and/or elimination of borrower benefits in
FFELP
• State and nonprofit lenders have serious difficulty
securing new loan capital
• Congress has intervened with a temporary fix (ECASLA)
• New Administration proposes move to solely Direct
Loans and Perkins Loans by July 1, 2010
• Alternatives to solely Direct Loans are being proposed
6
The President’s Proposal: the 2010 Budget
• Beginning July 1, 2010, all Stafford, PLUS, &
Consolidated loans be made from the Direct Loan
Program
• Subsidies currently paid to FFELP lenders would be
redirected to increase Pell grants at an annual savings of
$4.0 billion per year
• Expand the Perkins Student Loan Program
• OMB estimates $50.0 billion in savings over ten years;
CBO estimates $94.0 billion in the same period
• In short: replace FFELP with Direct Loans by July 1,
2010
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The President’s Proposal
• Direct Loan Funds to students provided by
auction of U.S. Treasury notes
• Loan origination & disbursement via the existing
USDE system for disbursing Pell funds or
“COD”
• Contract out the loan servicing function to
existing FFELP servicers on a competitive bid
basis emphasizing customer service and default
prevention
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Alternatives to President Obama’s Proposal
National Forum on Education Loans
February 2006
• A group of practicing student aid administrators met to
discuss “the ideal student loan program.”
–
–
–
–
One source of funds for a single loan program
Loan limits equal to Cost of Attendance minus other aid
Funds disbursed by the school
Flexible repayment options including payroll deductions or the
federal tax system
– Expanded opportunities for loan forgiveness
– Financial literacy programs prior to and during college
10
NASFAA Proposal 2009
• Combine the best features of FFELP, DL, & Perkins into one federal student
loan program
• Same loan terms for all borrowers
• Offer students a low, fixed-rate of interest
• A seamless loan origination, disbursement, & repayment experience
• Capitalize on the best practices of all current players in federal student loan
programs
• Ensure a continuous & predictable source of loan capital not dependent on any
single entity
• Utilize government-backed special purpose bonds to fund the program
• Reduce federal costs by creating a self-sustaining funding mechanism for
student loans
• Create a common servicing platform
• Create incentives to help students pay their student loans
• Shift the focus of guarantors to facilitate successful student loan repayment and
college access
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American Student Assistance
Proposal 2009
• Combine FFELP & Direct Loans into one federal loan
program
• Ensure fairness & equity with respect to educational debt
management services for all student borrowers
• Continue the public-private partnership for funding
educational loans minus costly lender subsidies
• Simplify the loan origination process and ensure a stable
source of funding for the new unified federal student loan
program
12
Sallie Mae Proposal 2009
• Objectives:
– Preserve choice, competition, & innovation in loan delivery
systems
– Strengthen programs & incentives to reduce defaults
– Greatly reduce implementation risks
• Components
–
–
–
–
–
–
Give schools choice to originate with DL or FFELP
Use federal funding for all government loans via ECASLA
Eliminate FFELP “special allowance” formulas
Common loan terms for both DL & FFELP
Servicing loans by competitively bid multiple contractors
Enhanced default prevention programs
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What Will Congress Do?
• Will it accept the 2010 Budget proposal to
move to DL & eliminate FFELP???
• Will it be a compromise proposal that
attempts to maintain both FFELP & DL in
some form???
• Who Knows for sure??? It may hinge on
how Congress deals with Reconciliation.
• The only certainty: Uncertainty!!!
14
A New Paradigm for Student Loans????
• Stop !!!!!
• Take a Deep Breath……
• Clear your mind of Conventional Thought!
• BE IN THE QUESTION! TAKE CHANCES!
GET MESSY!
15
Serious Doubts seem to always
precede Major Changes:
• “Who in their right mind would ever need more than
640k of ram?”……..Bill Gates, 1981
• “I think there is a world market for maybe five
computers.”…..Tom Watson, chairman of IBM, 1943
• “Who the hell wants to hear actors talk?”…. H.M.
Warner, Warner Brothers, 1927
• Everything that can be invented has been
invented.”……Charles Duell, Commissioner of U.S.
Patent Office, 1899
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A New Paradigm for Student
Loans beyond Direct Lending?
• Absolutely!!!!
• Current Federal Loan
System is too
–
–
–
–
–
–
Costly
Complex
Cumbersome
Inflexible
Overregulated
Cannot guarantee
access to loan capital
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
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ultimately cannot pay
Just for a Brief Moment,
Think of a Student Loan As…
• A social investment in human capital, not just
another student financial aid program
• Personal investment in one’s 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 nonperforming asset (not just a default!)
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Student Loans in the 21st Century:
What Do Students/Schools Really Want!
• A seamless totally electronic process with
minimal disruptions
• Timely delivery of loan funds measured in nano
seconds, not days or weeks
• Loan amounts sufficient to meet their needs
• Administratively burden-free processes
• Flexibility to deal with lifelong learning
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How About??
• A paperless process
• A line of credit versus annual & aggregate
loan limits
• Everyone is eligible with no in-school interest
subsidy or sub & unsubsidized loans
• No loan defaults; loans are either performing
or nonperforming
• No deferments or other confusing loan
repayment provisions
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Let’s Be Bold & Outrageous!
Create Lifelong Learning Accounts
• At birth, issue SS card and a lifelong learning account for postsecondary
education opportunities
• Parents/grandparents may contribute to the lifelong learning account as a
typical 529 savings plan for college and draw a tax deduction up to a
certain income level
• As student gets older and reaches the age he can work, a mandatory set
percentage of earnings (say 2%) is deducted from his earnings as a routine
part of his payroll withholding and deposited in his/her lifelong learning
account for college expenses
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Lifelong Learning Accounts
• As college expenses are incurred,
– The lifelong learning account is used by the
student
– To pay eligible college expenses defined as
cost of attendance minus all other aid as
certified by the school
– With authorization to draw into negative
balance thus exercising a lifelong line of
credit for education
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Lifelong Learning Accounts
• Student’s earnings (both in & out of school)
– Continue to be assessed the mandatory fixed
percentage to be deposited to his/her lifelong
learning account
– To pay down negative balances and
– Build positive cash balances for future education
expenses
• At age 65,
– Accounts with a negative balance would simply be
written off
– Elderly student may pass any positive balance in his
lifelong learning account on to his/her children’s lifelong learning account
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A Lifelong Learning Account Would:
• Be absent in-school interest subsidy thus eliminating
Need Analysis for eligibility
• One federal loan financing program providing total
access to loan capital for all students by retaining the
current “entitlement provisions” in Section 452(b) of
the HEA
• A standardized repayment system built into payroll
deductions & the current federal tax system.
• No borrower origination or guarantee fees! No
penalty or late fees or collection costs to incur
• Defaulted student loans would cease to exist! The
Lifelong Learning Account may always have either a
positive or negative balance
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The Lifelong Learning Account
of Tomorrow Would:
• Allow Congress to use the savings generated by
such a plan to maximize support for the Pell
Grant Program and
• Recognize there is a “shared” benefit that
educating all our citizens brings to society as
well as the individual student; and in the long
run, Society is the primary beneficiary of an
educated population!
25
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)
• 1999 Joe McCormick presentation at NASFAA Conference
• 2006 National Forum on Educational Loans
• 2008 Brian K. Fitzgerald, former head of the ACSFA – create a
College Access Account or “line of credit”
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The Future of Federal Student Loan Policy
Points to Ponder
As we review the various proposals being
discussed and monitor the debate and
deliberations of Congress on the future of
federal student loan policy, please
“Be in the question? Ask Why? Ask Why
Not?”
27
Why?
• Why are there interstate highways in Hawaii?
• Require schools to certify loans to guarantee
agencies, when they no longer guarantee loans?
• Why do we park our cars in a driveway and drive our
cars on a parkway?
• Have default rates with punitive damages for schools
and students but not for lenders?
• Why is a boxing ring square?
• Why do we need 106 questions on the FAFSA to
determine a fourth-generation welfare student is
eligible for in-school interest benefits?
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In a 21st Century Global Economy
• A highly educated and skilled citizenry is the
only way the United States can maintain a
position of leadership and prominence in the
world.
• “We will provide the support necessary for
you to complete college and meet a new goal:
by 2020, America will once again have the
highest proportion of college graduates in the
world.”
President Obama 29
America’s Standing in the World Rankings
of College Completion
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Japan – 91.3%
Denmark – 80.5%
United Kingdom – 79.3%
Russia – 78.5%
Germany – 76.9%
Belgium – 76%
Canada – 75.2%
Portugal – 73%
Finland – 72%
Australia – 71.6%
Austria – 71%
Netherlands – 71%
Slovak Republic – 70%
Switzerland – 70%
15. Sweden – 69%
16. Czech Republic – 67.7%
17. Norway – 67%
18. Estonia – 67%
19. Iceland – 66%
20. France – 64%
21. Slovenia – 64%
22. Poland – 63%
23. Mexico – 60.5 %
24. New Zealand – 58%
25. Hungary – 57%
26. United States – 56%
27. Italy – 45.3%
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Source: Postsecondary Education Opportunity, March 2009
As We Ask Why and Contemplate the
Future of Federal Student Loan Programs
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!
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Federal Student Loan Policy
for the 21st Century
Questions???
Comments???
Thank you!
Dr. Joe L. McCormick
jmccormick@kentuckycan.org
502/548-8165
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