Laws & Guidance HIGHER EDUCATION
Reauthorization of the Higher Education Act of 1965
Harrison M. Wadsworth III, Special Counsel's Office, Consumer Bankers Association Supporting Document - Letter and Additional Reauthorization Concepts
Archived Information



February 28, 2003

Jeffrey R. Andrade
Deputy Assistant Secretary for Policy, Planning and Innovation
Office of Postsecondary Education
1990 K Street, NW, Room 8046
Washington, DC 20006
ATTENTION: HEA Reauthorization

Dear Mr. Andrade:

The Consumer Bankers Association participated in a successful joint effort with other associations involved in the making and administering of Federal Family Education Loans to submit proposals for the reauthorization of the Higher Education Act. However, there are several subjects that are partially addressed in the joint Student Loan Community proposal that CBA believes deserve additional elaboration. These additional CBA views are attached.

The subject areas are consolidation loans, where CBA has additional specific reform proposals; institutions of higher education acting as lenders, a practice that CBA believes should be curtailed because of the potentially serious problems it could entail; and guaranty agencies, where CBA believes the use of voluntary flexible arrangements could lead to administrative problems for the FFEL Program.

We appreciate the opportunity to submit these comments, and look forward to working with you on this extremely important reauthorization. If you have any questions, comments or concerns, please contact me, or contact John Dean or Harrison Wadsworth of the CBA Special Counsel at 202-289-3900.

Sincerely,

Joe Belew
President


Consumer Bankers Association
Additional Reauthorization Concepts

February 28, 2003

PROGRAM TERMS and CONDITIONS (BORROWER)

Consolidation Loans

Statutory Reference: Sections 427A(k)(4); 427A(l)(3); 428C; 455(b)(6-7)

General Summary:
The current use of the Consolidation loan program has strayed from its original intent, with resulting adverse public policy outcomes. The program needs fundamental reform to once again serve its purposes as a part of the student financial assistance system: 1) providing those borrowers with multiple holders an opportunity to move their loans to one holder, and 2) allowing borrowers with financial duress the opportunity to extend their terms and lower their monthly payments.

Issues/Objectives:
Extending repayment terms for Stafford and PLUS Loans - a key part of the FFELP Student Loan Community Proposal -- will help alleviate the need for consolidation loans, which should return to their original intent as a financial management tool for those who wish to avoid making multiple payments to different lenders. The current law mis-match between the interest rate basis for consolidation loans and Stafford or PLUS loans has created a situation where the program has turned into a huge refinancing tool that has major federal cost implications. This subsidy for those who have already graduated, regardless of need, effectively reduces the government's ability to fund financial aid to needy students. This mis-match should be corrected, so that all three loan types are either variable or fixed. Changes to the consolidation loan program that rationalize the interest rates with underlying loans further solidify the role of consolidation loans as a loan that borrowers truly need.

Proposal:

  • Limit borrower eligibility to those with more than one holder or documented difficulty in repaying their student loans.
  • Ensure the interest rate structure (fixed or variable) of the underlying loan programs and the interest rate structure of the consolidation loan program are the same.
  • Effective upon enactment, make Consolidation Loans variable interest rate loans with an annual reset. For all-Stafford and mixed Stafford and PLUS Consolidation loans, use the Stafford spread and rate cap. For all-PLUS loans, use the PLUS spread and rate cap to set borrower interest. Assuming the 2006 fixed interest rate takes effect, Consolidation Loans would also become fixed at that time at either the Stafford or PLUS rate.
  • Require thorough borrower counseling to assure borrower understanding of the benefits and disadvantages of loan consolidation.

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Consumer Bankers Associationl
Additional Reauthorization Concepts

February 28, 2003

STUDENT LOAN ADMINISTRATION

School as Lender

Statutory Reference: Section 435(d)(1)(E) and Section 435(d)(2)

General Summary:
While current guidelines permit limited participation by institutions of higher education in the lender role, there is concern that "schools as lenders" create opportunities for conflicts of interest between schools' lending and educational roles. Schools that act as lenders have good intentions, but as the practice becomes more widespread, the potential for problems will grow. The current law permitting schools to lend to graduate students was put in place at a time when loans were not otherwise available for many students. There is no longer any need for schools to play this "lender of last resort" role.

Issues/Objectives:
Schools as lenders raise the potential for a conflict of interest, transforming the school financial aid office from a fiduciary for the student to the student's lender, with a vested interest in encouraging as much borrowing as possible. Even though the "profits" from the borrowing may be invested in all or in part in a good cause, it is not appropriate to have incentives to encourage student borrowing present in the office charged with being a trusted third party. Clearly, the financial aid office's role as a revenue center will come to the attention not only of the school's administration, but also the legislatures in many states, which will see an opportunity to further reduce state support. The net result will likely be status quo for the institution rather than the expected windfall. Note also that schools may not be subject to and/or complying with state licensing requirements for lenders, which raises an oversight question of importance to the federal and state governments as well as for the individual schools.

Proposal:

  • That the "school as lender" provision be eliminated, since there is more than adequate competition to provide loans to all students, and there is no need for a lender of last resort at the graduate level.
  • Require schools currently acting as lenders to phase out their programs by not lending to any additional students or parents.

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Consumer Bankers Associationl
Additional Reauthorization Concepts

February 28, 2003

STUDENT LOAN ADMINISTRATION

Standardize Claims Processing and Other Guaranty Agency Activities

Statutory Reference: Section 428

General Summary:
Few if any of guarantors operate within one state and with a group of lenders that do not also do business with other guarantors. As a result, it is not practicable for different processes or guidelines to apply. In that regard, the community has made much progress toward standardization. The trend toward commonality should continue and should be reflected in the law. Guaranty agency functions that differ and that affect outside parties should be standardized. Consistency and standardization within the guarantor community is necessarily a function of the law since guaranty agencies are creatures of the law. While other organizational types that participate in the student loan programs reflect the dynamic nature of the community and are formed and reformed by consumer demands, guarantors' range of function and financial underpinnings are detailed in the Act. As a result, differences among the agencies create inefficiencies and unnecessary complexities that are not controllable through competition. Clearly, standardization should include the useful ideas gained from the VFA models as cross-agency models are developed.

Issues/Objectives:
The guaranty agency structure and process should build upon the gains made in standardizing processes, allowing economies of processing for all parties.

Proposal:

  • Insist that changes in the functional activities as well as the financial support for guarantors be vetted with the broader student loan community.
  • Standardize and update the claims processing model for all guarantors, using the improved technology now available to adopt uniform standards for claims presentment and processing.
  • Take the best practices that have been an outcome of the VFA experiment and move on. Repeal the VFA provisions so as not to permit additional VFA's to be started.

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Last Modified: 02/09/2009