Ms. Leesa Sorensen, Senior Policy Analyst National Student Loan Program Supporting Document - National Student Loan Program
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NSLP believes that higher education plays an important role in the United States economy. This is why we are concerned about a recent finding by the Advisory Committee on Student Financial Assistance, which documented that more than 400,000 low and moderate income students per year are unable to attend college1. As a result, 4.4 million college-qualified students will not be able to attend a two or four-year institution during the first decade of the 21st century because of financial barriers. Because recent trends in the economy show a high demand for college educated employees, this comes at the worst possible time. By not meeting this demand, our nation's biggest shortage could soon become a shortage of well-educated human capital -- traditionally one of the United States' leading resources.
The Higher Education Act of 1965 ("the Act") was created to provide access to higher education and to help make such education affordable for low and middle-income American families. Over the years, the Act has been tremendously successful in ensuring the availability of the financial aid necessary for over 60 million students to gain access to higher education. One of the Act's most successful programs is the Federal Family Education Loan Program ("FFELP"). During the past 37 years, FFELP has delivered over $350 billion to students and their families.
The Act's reauthorization is approaching, and Congress has the daunting task of rewriting law that authorizes nearly $21 billion a year in federal funds to support student financial aid. Thanks largely to the private-sector capital provided through FFELP, these expenditures will be leveraged into more than $62 billion of financial assistance for an estimated 9.2 million college students and their families in fiscal year 2004. More than $33 billion of this financial assistance is expected to come in the form of low-cost FFELP loans. NSLP believes the major challenge of this reauthorization is to help FFELP and other financial aid programs more effectively ensure access and affordability for low and middle-income Americans.
The past success of FFELP can be attributed, in part, to the valuable contributions of guaranty agencies. Our early awareness and outreach activities, support for smooth and efficient loan origination, and loan guarantees assure students timely access to low-cost FFELP loans. We safeguard the federal interest by working directly with borrowers who are having difficulty making monthly loan payments. Our research on the causes of default allows us to identify high-risk borrowers, then educate them about options for avoiding default. If default does occur, we maintain public confidence in FFELP by recovering the defaulted dollars for the federal government.
In the past year, guaranty agencies teamed with the nation's banks to deliver more than $28 billion in new FFELP loans to students. Despite a deepening recession, we helped keep the nation's cohort default rate at a record low level of 5.9 percent, and we also collected more than $3 billion in past defaults.
Because guaranty agencies are so valuable to FFELP, NSLP is convinced that these agencies must remain strong, viable members of our nation's higher education finance system. We hope Congress will ensure that this is one outcome of the upcoming reauthorization.
NSLP believes the proposals in this paper will help make FFELP and the guaranty agencies that help administer FFELP more effective for students, schools, lenders, and the government. Further along in the reauthorization process, we may release supplemental recommendations as needed. We hope the following comments are helpful to Congress as it begins the reauthorization process for the Higher Education Act of 1965.
Pell Grant Program
Reference: Section 401(b)(2)(A)
Recommendation: The maximum Pell Grant should be increased and supported to authorized levels.
Rationale: By increasing the power of the Pell Grant, Congress can meet the Act's goals. Loans play an important part in meeting these goals, but NSLP believes a strong grant program is also necessary to ensure that the nation's neediest students are not overwhelmed with debt upon leaving college.
In 1972, Congress wanted to make certain that students had access and choice to two-year and four-year colleges by creating what is now known as the Pell Grant. Today, tuition increases are outpacing increases in family income and federal aid . From 1992 through 2001, tuition at two-year and four-year institutions rose by an average of about 23 percent. The purchasing power of the Pell Grant cannot keep up with this rising cost. Neither can the median family income, which rose by only 14 percent.
Reference: Sections 427A and 455(b)
Recommendation: Preserve variable interest rates for PLUS and Stafford loans, but with two different interest rate ceilings - one while the borrower is in-school and another, higher ceiling while the borrower is in repayment.
Rationale: Having two different interest rate ceilings would help keep the cost of borrowing low when borrowers are students while reducing the cost of government subsidies when borrowers are no longer students. Higher interest rate ceilings during repayment might also motivate borrowers to repay their loans more quickly, which would also help reduce the cost of government subsidies for borrowers after they leave school.
Reference: Sections 427A, 428C, and 455(b)
Recommendation: Congress should consider adopting a variable interest rate structure for consolidation loans with a ceiling that matches the ceiling for Stafford loans in repayment.
Rationale: The Act prohibits student borrowers who consolidated in past years from reconsolidating unless they return to school and borrow additional Perkins or Stafford loans. This effectively denies the benefits of subsequent lower-interest environment to past consolidation borrowers. It also has significant long-term financial implications for the federal government. Washington's interest subsidy and special allowance expenditures for Federal Consolidation loans increase as interest rates for borrowers decline. And federal interest earnings on Federal Direct Consolidation loans decrease as interest rates for borrowers decline.
While such an approach would diminish the benefits of long-term, low fixed interest rates for yesterday's students when rates rise, it would allow the borrowers of such loans to enjoy low interest rates whenever they occur and it would also mitigate long-term negative implications of long-term, low fixed interest rates for the federal treasury. NSLP does not wish to see Title IV funding for today and tomorrow's students jeopardized because the government is obligated to provide massive benefits to yesterday's students. Many of these borrowers are long out of school and at least some of whom enjoy relatively high incomes during the 10 to 30 year repayment periods on their Federal Consolidation loans and Federal Direct Consolidation loans.
Recommendation: Restore the student borrower's subsidized Stafford loan purchasing power to their 1987-88 levels, when the oldest of the current loan limits took effect. To do this, the annual maximum amount would have to rise above $5,200 for freshmen and sophomores and $8,200 for juniors and seniors.
Rationale: Stafford loan purchasing power is the percentage of the average student's tuition, fees, room, and board covered by the maximum amount of these loans. With increasing loan limits comes an increase in the purchasing power of loans. Loan limits have not been seriously discussed in Congress since 1992, and they are not keeping pace with college costs. In fact, since 1987-88, the purchasing power of subsidized Stafford loans has diminished by 33 percent for freshmen, 23 percent for sophomores, and 33 percent for juniors and seniors. If loan limits are not reset during this reauthorization, students attending college on the eve of the 2009-2010 reauthorization could be borrowing under limits whose purchasing power has been eroded by 20 to 25 years of inflation.
Reference: Section 428(b)(9)(A)
Recommendation: Adjust the repayment period of Stafford loans based on the amount of the borrower's outstanding FFELP indebtedness rather than the standard ten year repayment period. We recommend:
|Sum of Loan Balance||Maximum Repayment Period|
|Less than $7,500||10 years|
|$7,500 or greater, but less than $10,000||12 years|
|$10,000 or greater, but less than $20,000||15 years|
|$20,000 or greater, but less than $40,000||20 years|
|$40,000 or greater, but less than $60,000||25 years|
|$60,000 or greater||30 years|
We further recommend that this provision apply to all borrowers, old and new.
Rationale: The increasing cost of attendance has resulted in borrowers with larger levels of indebtedness. Under the standard ten year repayment plan, this leads to larger monthly payments. This, in turn, forces many borrowers to pursue loan consolidation to extend their repayment periods, even though consolidation may result in lost benefits related to the on-time repayment of the borrowers' loans. Adjusting the Stafford repayment terms based on loan amount reduces the need for borrowers to consolidate their Stafford loans in order to make their monthly payments more manageable and avoid default.
National Directory of New Hires (NDNH)
Reference: Section 428(l)
Recommendation: Create new statutory authority for Health and Human Services and the Social Security Administration to share information from the National Directory of New Hires ("NDNH") for purposes of default aversion. Authorize the Secretary of Education to share this information with guaranty agencies to help them resolve delinquencies before default.
Rationale: The NDNH has helped the Secretary distribute borrower information to guaranty agencies to assist them in the collection of defaulted loans. Currently, guaranty agencies are only able to receive information on borrowers after they have already defaulted. By sharing information from the NDNH database during default aversion activities, the guaranty agencies will be better able to obtain addresses and places of employment for borrowers while they are delinquent. This will enhance the ability of guaranty agencies to offer delinquent borrowers repayment options, such as forbearance and deferment, that help keep their student loans in good standing.
Default Aversion Fee Retention on Repurchases
Reference: Section 428(l)(2)(B)(ii)
Recommendation: A default claim that is later repurchased should be considered an averted default. The guaranty agency should be permitted to retain its Default Aversion Fee (DAF) when repurchase occurs.
Rationale: Repurchases are often executed to reverse guaranty agency purchases of default claims. Therefore, repurchases reduce the federal government's reinsurance costs. The statue should therefore be redefined to clearly show that repurchases are successful default reversals and that guaranty agencies may retain their DAFs because of actions taken to return repurchased loans to good standing.
Cohort Default Rate Calculation
Reference: Section 453(m)
Recommendation: The current calculation should be modified so, if a default claim is paid during a cohort year and that loan is later repurchased for any reason or converted to a closed school or false certification claim during that same cohort year, the loan should not be counted in the cohort calculation.
Rationale: The current calculation reflects inaccurate default information, which results in inflated cohort default rates for schools, lenders, and guaranty agencies. Changing the calculation will more accurately reflect the correct status of the loan and borrower. As we move forward, with recession, inflation, and national emergencies such as September 11, it is already apparent that cohort rates will go up. We need to do these adjustments and more accurately calculate these rates as soon as possible or cohort rates will continue to look worse than they really are for all FFELP participants, including the Department of Education ("ED").
Note: ED recently announced its intention to take administrative steps to eliminate from the cohort calculation defaulted loans that are converted to closed school or false certification claims during the same cohort year. It has announced no similar intention to eliminate defaulted loans that are later repurchased from the cohort calculation.
Payment Requirements to Rehabilitate Defaulted Loans
Reference: Section 428F(a)(1)(A)
Recommendation: Modify the payment requirements for the rehabilitation of defaulted loans to nine consecutive, voluntary, and timely payments.
Rationale: A borrower that doesn't make voluntary and timely payments defaults in 270 days, or nine months. Currently, a defaulted borrower is required to make 12 complete, consecutive, on-time payments to rehabilitate his or her defaulted loan. The time it takes a borrower to go into default should be reflective of the time it takes to get out of default. Adjusting to nine months would expedite recovery on collection dollars for the federal government. In addition, modifying this requirement would be a better service to borrowers by making loan rehabilitation more accessible to them.
Administrative Wage Garnishment (AWG)
Reference: Section 488A
Recommendation: Establish a unified withholding rate of 15 percent for Administrative Wage Garnishment ("AWG") between ED and guaranty agencies.
Rationale: The withholding rate is the maximum percentage of a defaulted student loan borrower's disposable income that may be garnished. Currently, ED has a higher withholding rate at 15 percent than guaranty agencies, which are constrained to 10 percent. This clearly creates inequity among borrowers based on the holder of their loans. It also puts guaranty agencies at a disadvantage in terms of their ability to use AWG to recover defaulted dollars. And, since guaranty agencies hold, collect, and return to the federal government a significant portion of FFELP defaults, a unified rate would make for more effective collections.
Recommendation: Direct the Secretary of Education to conduct the Title IV customer identification data matching required under the USA PATRIOT Act, the Bank Secrecy Act, and similar federal laws.
Rationale: Providing for centralized and coordinated customer identification outlined by federal law falls well within the role and jurisdiction of the Secretary. Using information provided by Title IV applicants through the FAFSA, the Secretary can perform such data matching earlier and more effectively than individual FFELP participants. This would assure that other federal financial aid is not given to people on restricted lists.
Social Security Information
Recommendation: Authorize the continued use of borrower and student Social Security Numbers ("SSNs") to be an allowable account identifier for all Title IV loans. Exempt SSNs used for this purpose from state laws limiting SSN usage.
Rationale: The student loan and higher education communities use SSNs as account identifiers for Title IV loans, although the authority to do so is not expressly stated in federal law. Limited SSN usage would frustrate the efficient processing of federal student loans. Allowing the use of SSNs as federal student loan identifiers would ease account maintenance and decrease error. It would help ED and FFELP participants avoid unnecessary and sometimes incompatible state-specific SSN usage requirements.
1 Advisory Committee on Student Financial Assistance. (2002). Empty Promises: The Myth of College Access in America. Washington, DC: Author.