Government Takeover of Federal Student Loans Destined for Failure
While the US Government considers a complete takeover of the federal student loan program from private student loan companies, the UK’s Student Loans Company, a Federally run student aid program, is experiencing significant delays in funding students: According to SkyNews “As many as 50,000 students will start university next week without all the loans and grants they expected. The backlog is being blamed on the numbers of people applying for financial help. University applications are up 17% on last year. The Student Loans Company, the firm tasked by the government with distributing the loans, has failed to process thousands of applications.”
What is in store for the more than 15 million US college students who will be dependent on the US government processing their student aid on time? Could not happen here you say… Check back in the winter of 1995 when the headlines were: “Budget deadlock forces federal shutdown”. Yes – student loan disbursements were delayed. It has happened here. It is happening in the UK. It will happen again.
We must consider a new model that has private lenders working hand in hand with the federal government to provide a variety of options and competition. Everyone agrees that having both has improved quality of service, freedom of choice and lowered costs.
(2 votes, average: 5.00 out of 5)
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I agree that allowing ED to be the sole decision-maker could lead to a financial aid meltdown. Reports of the backlogged applications in the UK reminded me of ED's management of Direct Consolidation Loan applications 13 years ago. In that case, ED had only to manage one servicer (EDS), which began processing apps in September 1996. By the following August, there was a backlog of 84,000 apps, over half the number of apps received by EDS in the preceding 11 monts. Congress was forced to pass emergency legislation that allowed FFELP lenders to consolidate FDLP loans.
Competition is a good thing. It was a good thing when the Direct Loans graduated from a pilot to a full-scale program in 1993; this jolted FFELP lenders and guarantors into a series of improvements that have proved to be the best things to happen in student lending. Some will argue that the SAFRA version passed by the House on 9/17 ensures competition by requiring ED to contract with local non-profit servicers. One has to think through the idea only a little to realize that it doesn't engender meaningful competition, since it disqualifies many current servicers and allocates to selected servicers only those loans that are made for attendance at schools within their states. Continuity, split servicing, and lack of competition remain huge issues.
I favor NASFAA's proposal: Make all federally backed loans assets of the US, but allow schools to continue to make decisions on who will service the loans and who will help with origination and adjustment in the early stages. This saves the costs of using private capital and leaves the current infrastructure in place, thus reducing the tremendous risks of transitioning to the new program and encouraging continued improvements in service.
Scary – Contact your Senators!
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