The Future of Student Lending: Should There Be a New Paradigm Beyond Direct Loans???

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The Future of Student Lending Should There Be a
New ParadigmBeyond Direct Loans???
Parent Loans
FFELP
????
Direct Loans
Perkins
WASFAA April 2009
Dr. Joe L. McCormick KentuckyCAN, Inc.
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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

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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

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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

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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

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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

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The Presidents 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 Presidents 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 Obamas Proposal
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National Forum on Education LoansFebruary 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

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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

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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!!!

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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!

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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
ultimately cannot pay
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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 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!)

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Student Loans in the 21st CenturyWhat 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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Lets 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

• Students 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
  childrens life-long 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!

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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)
• 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 PolicyPoints
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?

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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

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Americas Standing in the World Rankings of
College Completion

1. Japan 91.3
2. Denmark 80.5
3. United Kingdom 79.3
4. Russia 78.5
5. Germany 76.9
6. Belgium 76
7. Canada 75.2
8. Portugal 73
9. Finland 72
10. Australia 71.6
11. Austria 71
12. Netherlands 71
13. Slovak Republic 70
14. 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

Source Postsecondary Education Opportunity,
March 2009
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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_at_kentuckycan.org 50
2/548-8165