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Education Lender Community Proposal for an Alternative to 100% Direct Lending

A conference call was held the morning of July 7, 2009 to introduce a community proposal from more that two dozen education lenders, servicers, guarantee agencies, banks, secondary markets and state loan agencies. The proposal is intended as an alternative to President Obama's proposal for 100% direct lending.

Speaking on the call were:

  • Ron Gambill, Chairman & CEO, Edsouth
  • Jeff Noordhoek, President, Nelnet
  • Tim Connell, President, Georgia Student Finance Commission
  • Tony Hollin, Chairman & CEO, Edfinancial Services
  • John Vidovich, Executive Sales Director, The Student Loan Corporation

Endorsers of the Community Proposal

Organizations signing on to the proposal include Brazos, Citi Student Loan Corporation, Citizens Bank, ECMC, Edfinancial Services, EdSouth, FAME, Florida Department of Education - OSFA, GHEAC, GSFA, IDAPP, ISAC, KHEAA, KHESLC, Louisiana Office of Student Financial Assistance, Missouri Department of Higher Education, MOHELA, NHHEAF, NSLP, Nelnet, NMSL, NY HESC, NCSEAA, NELA, PNC Bank, RIHEAA, Sallie Mae, SLGFA, SunTrust, TSAC, USA Funds, UHEAA and WSLC. (NHHEAF and USA Funds has previously issued their own proposals.) These lenders represented more than two-fifths of FY2007 FFELP loan volume.

Major lenders not endorsing the proposal include Bank of America, JPMorgan Chase, Wells Fargo and US Bank. (Banks that rely on customer deposits as a low-cost source of funds instead of ECASLA are unlikely to endorse the proposal because it significantly reduces their profit margins.)

The Lender Community Proposal

The proposal is similar to the Sallie Mae proposal, but modified to make it more attractive to state guarantee agencies and state loan agencies by preserving a role for these nonprofit organizations.

As with the Sallie Mae proposal, there would be no special allowance payments (SAP) or lender paid origination fees and the US Department of Education would be the beneficial owner of the loans.

The differences are as follows:

  • Colleges would be able to select two or more eligible lenders to originate loans to their students and the parents of their students.

  • The spread fee has been renamed as the loan administration fee and the amount increased from 60 bp to 69 bp (annualized).

  • The put fee has been renamed as the origination fee and remains at $75, but $20 of the fee would be paid when the lender sells the 100% participation interest to the US Department of Education and the remaining $55 when legal title to the loans was transfered to the US Department of Education.

  • For loans first disbursed on or after 10/1/2012, the new proposal has the US Treasury set the loan administration and origination fees instead of through a competitive bidding process.

  • It adds a provision allowing the US Department of Education to sell loans under terms it determines are in the best interest of the federal government.

  • It allows not-for-profit and state servicers to service loans made at colleges in the state of the servicer, regardless of any size restrictions in the US Department of Education's servicing contracts. It requires servicing fees to be volume based so that smaller servicers get paid a higher fee per loan to compensate for the amortization of higher average fixed costs per borrower. It includes the origination and servicing of consolidation loans. It allows for subcontracting of all or part of the services to be provided by the servicer.

  • It preserves a lock on servicing by the originator of a loan, letting colleges specify the servicer otherwise. The conference call and the fact sheet suggested that borrowers would be able to choose a servicer for their loans, but the legislative language does not speak to this possibility. Schools would be able to choose servicers to the extent not precluded by a servicing lock provided to the originating lenders. Borrowers could choose an originator from among the list of two or more originators selected by the school (and thus would have a choice of initial servicer), but would not have the ability to change servicers after the loans entered repayment other than through a limited ability to consolidate loans with another servicer. Although this presents borrowers with a limited degree of choice, much more constrained than under the current system, it provides more choice than under the Obama Administration's 100% Direct Lending proposal.

  • It restores a version of the single holder rule with regard to consolidation loans (i.e., giving the borrower a choice of consolidation servicer only if their current servicer does not originate and service consolidation loans). Consolidation would be treated as a servicing transaction rather than an entirely new loan. There would be no origination fees paid to loan originators for consolidation loans. Borrowers could extend repayment terms without consolidating their loans.

  • It allows the US Department of Education to reduce or waive the risk-sharing requirements for small servicers. Small servicers are defined as having gross revenue less than $100 million and serviced loan volume of less than $2 billion. These figures will be adjusted annually by CPI and growth in the total federal education loan balance outstanding.

  • It requires the US Department of Education to establish objective standards for loan servicing, financial literacy and default aversion by small servicers.

  • It allows the bids for servicing contracts to propose different servicing fees based on type of loan and level and control of institution. This is intended to accommodate the risk sharing component of the proposal, where loans made to different types of borrowers carry a higher risk of default.

  • It provides for standardization of forms and procedures among the servicers.

  • It provides for the US Department of Education to contract with state guarantee agencies and other providers for default collection services. It also allows the US Department of Education to sell defaulted loans.

  • It requires at least 1/3 of the College Access and Completion Fund to be allocated to states for financial literacy education, allocated according to the FTE enrollment in each state. The states will grant this funding to state guarantee agencies and nonprofit state loan agencies. It also mandates that a portion of the College Access and Completion Fund be allocated for outreach services.

  • Guarantee agencies would also provide "borrower support services" such as default aversion and exit/entrance counseling. The fees for these services would be paid by the US Department of Education and would be limited to $2.25 billion over five years and $5.5 billoin over ten years.

  • It would expand the ABCP conduits under ECASLA to include consolidation loans made between 5/1/03 and 7/1/09 that are not more than 210 days delinquent. This would help resolve some of the outstanding liquidity issues among lenders while generating additional fee income for the federal government.

Analysis of the Proposal

Most of the analysis of the Sallie Mae proposal applies to this proposal as well. The inclusion of provisions attractive to non-profit lenders and guarantee agencies add more than $5 billion to the cost of the proposal. However, this proposal moves them from mandatory funding to discretionary funding, which would remove them from consideration under the Congressional Budget Office's scoring methodology. The 100% Direct Lending proposal similarly pays for administrative expenses through annual appropriations, although these expenses are lower in part because some of the administrative burden is carried by colleges and the community proposal involves more funding for default aversion and financial literacy. But clearly, both the community proposal and the 100% Direct Lending proposal are guilty of using accounting gimmickry to omit important costs from calculations of the potential savings.

The speakers on the conference call and the fact sheet and other materials on the America's Student Loan Providers web site emphasized several differences between this proposal and the 100% direct lending proposal: choice, competition, jobs, risk sharing by servicers, transition/execution risk, and avoiding the splitting of borrowers among multiple servicers. Of these, the potential impact on jobs will most likely have the greatest influence on Congress, since unemployment rates will exceed 10% by the time Congress votes on either the 100% Direct Lending or this proposal. The success of this proposal will also depend on the extent to which it does or does not offer similar savings to the Obama administration's 100% Direct Lending proposal as scored by the Congressional Budget Office.


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