Student Financial Aid News

From Inside Higher Ed:

On Tuesday, a broad array of companies and loan agencies (with some notable exceptions) offered an alternative to the Obama plan that departs in a few key ways — continuing to allow lenders to originate loans, and to let state and nonprofit lenders “service” loans in their regions — but endorses the administration’s overall goals of having the government own all federal loans and redirecting tens of billions of dollars in lender subsidies to increase aid to students.

Individual colleges could select to have their students’ loans originated by at least two lenders of their own choosing, based on the lenders’ delivery technology, customer service and quality (all loans, whether originated by the government or lenders, would have the same terms, so there would be no competition on that front). The government would pay lenders a loan administration fee (0.69 percentage points times the principal of the loan) and a $75 origination fee for each loan, and the lenders would be required to sell the loans to the government within 120 days of disbursement. The entities that originated loans would have the right to continue to service the loans if colleges chose them as their servicers. State agencies and nonprofit lenders, which would be largely left out of loan servicing under the Obama plan, would continue to be able to compete to service loans on a fee-for-service basis under the alternative. Companies or agencies that service loans would agree to absorb some of the risk of borrowers’ defaults by paying the government 3 percent of the unpaid principal, generating additional savings for the plan and, the lenders argue, giving them added incentive to keep borrowers out of default.

Commentary

The trouble that the student loan industry is facing is simply this: with the credit crunch depleting the ability of lenders to provide federal student loans, the Department of Education’s direct and indirect financing of Stafford loans, PLUS loans, and Perkins loans has filled the gap and not been an operational disaster as was predicted at the start of the credit crisis. As such, there’s little compelling reason to share operational profits with third parties – even reputable student loan companies – as the government has proven resilient and adaptable to the increased demand.

It’s still far too early to see any long term effects of an increased Direct Loan program presence in terms of default rates, but at least in terms of student loan origination, the Direct Loan program is working for those schools that have adopted it. The plan proposed by the lending consortium doesn’t make a whole lot of sense given current conditions and the Department of Education’s performance to date.

What will likely happen is that student loan companies will refocus on private student loans – non-government student loans – after any new legislation takes effect.

As always, we’ll keep you posted of new changes as information becomes available.

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