Daily Aid 114: Sallie Mae Federal Student Loan Proposal

Home » Defaulted loans, Focus on Financial Aid, Mailbag, Private student loans, Scholarship Update, Student Loans

Daily Aid 114: Sallie Mae Federal Student Loan Proposal

16 April 2009 1 views No Comment

Daily Aid 114: Sallie Mae Federal Student Loan Proposal

Student Financial Aid News

Sallie Mae (ticker: SLM), which as the country’s largest student loan provider has a lot to lose from the Obama administration’s proposal to eliminate the Family Federal Education Loan Program, is floating an alternative that would save the program but cut its costs significantly. In a letter to sent to its college customers, the lender outlined a plan that would entail permanently extending the emergency programs that Congress put in place in 2007 to ensure the continued availability of student loans given the distress in the financial markets but, like the Obama plan, contract out to companies through auction the right to service all federal student loans. Competing analyses of the Sallie Mae plan by Mark Kantrowitz, publisher of Finaid.com, and the New America Foundation put the savings from the plan at between 80 and 90 percent of that promised by the administration’s proposal to move to 100 percent direct lending.

Commentary

In reading the Sallie Mae proposal, there are a couple of loopholes. First, there’s a Master Loan Purchase in the legislation which effectively requires the Department of Education to purchase any federal student loan issued by a student loan company. While this doesn’t impact federal Stafford loans, it does include the credit-based parent PLUS loan and graduate PLUS loan, which creates an incentive to lend without risk to the lender. Currently, the credit restrictions on PLUS loans are looser than on private student loans, so the Department of Education would end up buying loans issued to borrowers who probably shouldn’t be issued loans.

While there is language for servicers sharing the risk of default, their participation in default prevention is limited in scope to 4 years after a loan enters repayment. If you look at historical data for loan defaults, a lot of borrowers run into trouble around year… seven. Within 4 years of repayment, you have effectively 3 years of deferment plus a year of forbearance which means that the lender can theoretically encourage a borrower to keep putting off payment until after their responsibility for the loan ends.

Finally, there’s no language in the proposal about origination and guarantee fees for borrowers, only eliminating fees for lenders.

Will this proposal be in the best interests of students? Honestly, I don’t think so, any more than President Obama’s plan to eliminate the FFEL federal student loan program. While the President’s plan effectively puts any form of customer service or incentive to prevent default through competing lenders in the tank (bad for students), creating any kind of program where originating loans without risk to the lender is also bad for students.

The best solution in my mind would be something along the lines of the current securitization model, which allows the Department of Education to buy loans, combined with eliminating the distinction of Direct vs. FFEL lending (allowing students and schools 100% choice of any lender they want, ensuring that no student or school is ever without a lender in bad times but allowing lenders to compete in good times), and a clause in the buyback mechanism that says if a student loan sold to the government enters default, the lender has to buy it back from the government at cost. That would ensure a strong financial incentive for lenders to aggressively prevent defaulted student loans.

Scholarship Update

Access to knowledge is our thing. When it comes to higher education for promising scholars, we don’t want anything to stand in the way. That’s why we’re proud to partner with Lime. Google is committed to helping the innovators of the future make the most of their talents by providing scholarships and networking retreats for computer science students with disabilities. Recipients of the Google Lime Scholarship will receive a scholarship for the 2009–2010 academic year. Selected students will also be invited to attend the all-expenses-paid retreat at the Googleplex in Mountain View, CA, in 2010. Scholarships will be awarded based on the strength of candidates’ academic background and demonstrated passion – $10,000USD for those studying in the US and $5,000CAD for those studying in Canada (based on average tuition costs).

Details at our free college scholarship search site.

Mail Bag

Myesha writes:

Hi, I don’t know if this is the place to ask this, but I’m looking for as much help as I can get. I was accepted to the University of Miami last year as a transfer student. I deferred my enrollment for a year for financial reasons. It’s almost time to re-enroll but I’m still in the same predicament. According to UM’s website a year of school would cost about $55,000. My EFC is about $51,000. So on paper, it looks like I don’t really have a problem. My parents tell a different story. They say they can only afford to give me about $20,000 a year. So I have to come up with $35,000 and fast. I don’t know how I’m going to do this. I’ve been actively searching and applying for scholarships, but there’s no guarantee I will actually win any. So the next logical thing to do would be apply for loans, right? Well I don’t know if that will work for three reasons. 1) I’m not too excited about graduating from college with almost $70,000 in student loan debt. 2) Even if I wanted to, I’m not sure I could even get a loan and my parents do not want to co-sign one for me. 3) I don’t know if that’s the best thing to do in the current economy. So do I even have any options left? I’ve spent two years at a less expensive state school, so I only have two years of college left. I thought about looking into other schools, but my major isn’t one that you can get at just any school. Do I even have any options at this point? Should I just give up on UM, change my major and go to state school even though I would really prefer not to? I really don’t want to give up on UM but it kind of looks like I’m out of options.

To be perfectly honest, I can’t think of many careers that would start you off with a salary of $70,000 per year, which is what you’d need to make out of the gate just to make that size of student loan affordable after college. Your scholarship search is exactly the right way to go, and your instincts about borrowing that much money are also spot on.

There aren’t many programs I can think of at the undergraduate level that merit graduating with that much debt. Bachelor’s degrees are a dime a dozen in terms of common availability, and a degree from one institution, at least from my perspective as a hiring manager, doesn’t carry any more weight than another institution. Your Harvard undergraduate degree is worth about the same as a UMass undergraduate degree to me.

Talk to UM’s financial aid office and see how creative they can get with institutional funding, but I would avoid borrowing that much if at all possible, and save up to take a graduate degree in the field you want to pursue, as graduate degrees are less common and therefore more valuable and worth borrowing a little bit more for.

Given the current economy, if you can do so, avoid borrowing at all. Despite claims to the contrary by politicians and retailers desperate to sell, I don’t see a huge economic recovery in the jobs market by the time you graduate, so you’ll be graduating into a period of time when things will be picking up but not rich with opportunities. Minimizing your future debt is the smart thing to do, so that if you have to live on a shoestring budget for a while after graduation, what cash you have will not be going towards debt payments.

Did you enjoy this? If so, please consider subscribing for free to get it delivered to you. Subscribing for free means you don’t have to remember to download it every day.
+