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ANewParadigmForStudentLoans by niusheng


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

       Parent Loans

        Perkins          Loans

                                  Dr. Joe L. McCormick
           April 2009             KentuckyCAN, Inc. 1
        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
  – 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
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                                          3
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

   Major Distinctions in FFELP &
           Direct Loans
• FFELP                         • Direct Loans
  – Loan availability is          – Loan availability is
    conditional, not required       mandatory & required in
  – CBO scores FFELP as a           statute
    cost only to federal          – CBO scores both a cost & a
    government                      revenue to DL
  – Multiple loan origination     – Single source for loans
    systems                       – Income-contingent
  – Income sensitive                repayment option
    repayment option
   Federal Student Loans Today
• FFELP financing in turmoil
• Access to private loans increasingly restricted
• Reduction and/or elimination of borrower benefits in
• 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
The President’s Proposal: the 2010 Budget

• Beginning July 1, 2010, all Stafford, PLUS, &
  Consolidated loans be made from the Direct Loan
• 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,
       The President’s 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
• Contract out the loan servicing function to
  existing FFELP servicers on a competitive bid
  basis emphasizing customer service and default
Alternatives to President Obama’s Proposal
 National Forum on Education Loans
           February 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

            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
• 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
     American Student Assistance
           Proposal 2009
• Combine FFELP & Direct Loans into one federal loan
• 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

       Sallie Mae Proposal 2009
• Objectives:
  – Preserve choice, competition, & innovation in loan delivery
  – 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                      13
    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!!!
 A New Paradigm for Student Loans????

• Stop !!!!!

• Take a Deep Breath……

• Clear your mind of Conventional Thought!

  GET MESSY!                     15
  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
       A New Paradigm for Student
      Loans beyond Direct Lending?
• Absolutely!!!!               Ideal Loan System would:
                               ** Serve intended populations
• Current Federal Loan
  System is too                ** Provide uniform benefits
  –   Costly                      to borrowers

  –   Complex                  ** Maximize incentives for
  –   Cumbersome                  repayment
  –   Inflexible               ** Reward public service
  –   Overregulated
                               ** Provide public subsidy for
  –   Cannot guarantee
                                  those most in need who
      access to loan capital      ultimately cannot pay
        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 one’s 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!)         18
  Student Loans in the 21st Century:
What 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
        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                          20
     Let’s 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

  Lifelong Learning Accounts
• As college expenses are incurred,
  – The lifelong learning account is used by the
  – 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
    Lifelong Learning Accounts
• Student’s 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
• 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 children’s life-
    long learning account                                 23
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                           24
  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!
      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”                      26
The Future of Federal Student Loan Policy
            Points 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

• 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?
 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

• “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
                            President Obama 29
America’s Standing in the World Rankings
          of College Completion
1.    Japan – 91.3%                  15. Sweden – 69%
2.    Denmark – 80.5%                16. Czech Republic – 67.7%
3.    United Kingdom – 79.3%         17. Norway – 67%
4.    Russia – 78.5%                 18. Estonia – 67%
5.    Germany – 76.9%                19. Iceland – 66%
6.    Belgium – 76%                  20. France – 64%
7.    Canada – 75.2%                 21. Slovenia – 64%
8.    Portugal – 73%                 22. Poland – 63%
9.    Finland – 72%                  23. Mexico – 60.5 %
10.   Australia – 71.6%              24. New Zealand – 58%
11.   Austria – 71%                  25. Hungary – 57%
12.   Netherlands – 71%
13.   Slovak Republic – 70%          26. United States – 56%
14.   Switzerland – 70%
                                     27. Italy – 45.3%
                          Source: Postsecondary Education Opportunity, March 2009
   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!
Federal Student Loan Policy
   for the 21st Century
       Thank you!
      Dr. Joe L. McCormick


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