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Sorting Through Proposed Student Loan Reform Plans

On Thursday morning, the Committee on Education and Labor in the U.S. House of Representatives is planning to hold a hearing to examine proposals for increasing aid to college students. Featuring representative from the Obama administration, the lending community, and institutions of higher education, the hearing is expected to be the first step in a legislative process that will likely lead to wholesale changes in the federal student loan programs.

Ever since President Obama released his bold proposal to eliminate the Federal Family Education Loan (FFEL) program and use the savings to make Pell Grants into a true entitlement, a number of other groups or companies have stepped forward with alternative proposals for overhauling federal student aid. Some of them, such as Sallie Mae's student loan reform proposal, have already been discussed here, while others, such as the National Conversation Initiative from the National Association of Student Financial Aid Administrators (NASFAA), have not.

Higher Ed Watch has put together the following table to help sort out the different proposals from the administration, Sallie Mae, NASFAA and the National Association of Student Loan Administrators (NASLA). The last is a group of four guaranty agencies that support student loan reform. They include American Student Assistance, TG, EdFund, and Great Lakes Higher Education Corp. Higher Ed Watch contacted the National Council of Higher Education Loan Programs, the Education Finance Council, and the Consumer Bankers Association to also be included, but none shared a proposal with us. For a spreadsheet containing all of the proposed loan models, plus the existing FFEL and Direct Loan Programs, please click here.

Proposed Federal Student Loan Models







Sallie Mae









Loan Funding Source

U.S. Treasury Private capital and the U.S. Treasury. Loans made with private capital would then be sold to the Department of Education. N/A New "Education Finance Bonds" available to the general public. The Department of Education would then cover any gap in financing needed.



Loan Origination

The Department's Common Origination and Disbursement System. The Department's Common Origination and Disbursement System or by a private lender selected by a college. N/A Handled by a single entity determined through competitive bidding.



Loan Servicing

Private sector servicers selected by competitive bidding The originating lender or one of the private servicers competitively chosen by the Department of Education and then selected by the college N/A Private sector servicers selected by competitive bidding



Servicing Accountability

Servicing volume will be allocated based on performance measures that will be provided later If a loan defaults within four years of entering repayment, and the servicer has overseen it for at least two consecutive years, then servicers must pay the Department an amount equal to 3 percent of a loan's balance Fees given for borrower assistance cease if the loan enters default Compensation tied to "default success rates calculated over multiple years"



Lender Subsidies

None No quarterly special allowance payments, but lenders receive a 0.60 percent fee for holding a loan before selling it to the Department, plus $75 once that sale goes through* N/A None



Guaranty Agency Subsidies

None A "new program that redirects guaranty model cash flow origination and account maintenance to financial literacy and default aversion programs," but lacks specifics Guaranty agencies, or borrower advocates, receive $3 a month per borrower beginning with disbursement until a loan defaults or is repaid None



Loan Default Prevention

Performed by private sector servicers selected by competitive bidding Handled by loan companies under either the same or a separate servicing contract Guaranty agencies would assist borrowers with selecting repayment options and also averting delinquency and default Handled by servicers or other default prevention specialists, such as a guaranty agency



Defaulted Loan Collection

Performed by private sector servicers selected by competitive bidding Private collection agencies selected by the Department of Education based on their relative success in loan collection No longer handled by guaranty agencies Handled by the Department's Debt Management Collection System



Nonprofit Lender/Guaranty Agency Role

State or national agencies already providing college outreach and information activities can use the new $500 million a year college access and completion fund to continue paying for these programs Nonprofit lenders could keep participating if they met the Department of Education's servicing guidelines Guaranty agencies would become borrower advocates that provide both informational and technical assistance to students, families, and schools Could offer special benefits for borrowers or purchase borrowers' loans and assume liability for them to offer benefits. Guaranty agencies can also bid for servicing or default prevention rights



Loan Limits

Unchanged from current legislation Unchanged from current legislation Unchanged from current legislation Equal to the maximum Pell Grant award



Pell Grants

Maximum award set at $5,550 for the 2010-11 school year with subsequent annual increases of the CPI plus 1 percentage point Maximum award depends on CBO score of proposal's projected savings N/A Maximum award set at $12,900, which is 70 percent of the weighted average of in-state tuition, fees, room, and board at four-year public colleges and universities, rounded up to nearest $100**



Pell Financing Source

Mandatory funding only (financed by the elimination of subsidies for private student loan companies and guaranty agencies) Savings from this proposal would be directed into Pell Grants N/A Use savings from eliminating ACG and SMART Grants, as well as the Perkins Loan Program



Estimated Cost/Savings***

Savings of at least $20 billion over five years, according to OMB estimates Awaiting CBO score Roughly $522 million annually, according to NASLA estimates None provided

*Fees will be determined by an auction process beginning in the 2013 federal fiscal year
**Increase is phased in over five years
***Relative to current cost of the two loan programs

Current and Proposed Federal Student Loan Models.xls24.5 KB
NASLA Proposal.doc40.5 KB