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Is It Time for One Loan Program?

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Students would be better served if there were one  federal loan program rather than all of the different ones available today. That’s the conclusion a group of aid administrators reached when they studied the loan system. In a guest post today, Rick Shipman explains their thinking. Mr. Shipman, director of financial aid at Michigan State University, is scheduled to present on this topic at the annual meeting of the National Association of Student Financial Aid Administrators, in Las Vegas, this week.

The federal student-loan system is broken! There, I said it. If you work in the financial-aid profession, your reaction is to yawn. If you are a student or parent, you breeze through it as just another confusing story about a confusing topic. If you are a member of Congress, you scratch your head and wonder what in the world could this person mean by such a statement—aren’t the federal loans wonderful and helping millions earn degrees?

This truly is a case where only those who work in the trenches every day as go-betweens for the federal student-loan system and borrowers understand that the system is broken and how easily it could be fixed.

Let’s look at the environment. Congress has known for a year that the subsidized Stafford Loan interest rate was going to double, and yet they continue to debate it even after the deadline has passed. They also continue to talk about income-based repayment improvements but cannot agree on any specific approach. While these might be important issues, they really don’t do anything to get more dollars into the hands of those who need to borrow to pay for college.

These are incremental changes at a time we need revolutionary changes. We need to combine the various federal student-loan programs into a single loan and do it in such a way that private loans become unnecessary for the vast majority of students.

Many problems emerge from having multiple loan programs. The first and most obvious is that students are confused about the different terms and conditions. When does repayment begin? What is the interest rate? Are there origination fees? Are there debt-reduction provisions?

Also confusing is the need to complete multiple promissory notes. Who do I send payments to? Can I consolidate? Although the subsidized and unsubsidized Stafford Loans share a common note, the Perkins, PLUS, and private loans all have their own versions. Then there is the uncertainty of borrower eligibility when a PLUS or private loan is recommended. Just because one of these loans is listed on an award letter doesn’t mean the borrower will be approved.

Why do colleges offer a student various loans instead of just one of the many, you ask? The answer is easy and points to the heart of the problem: The loans that carry the best terms and conditions also severely limit the amount a student can borrow. So colleges have a choice of offering one loan for the full amount knowing the student will pay more in the end, or they can offer as much as possible from each loan program in order of desirability. Of course, the choice doesn’t really exist as regulations require colleges to offer the best loans first. The result is the student ends up with several different types of loans.

Let’s step back in time for a moment. In February of 2006, I joined a group of financial-aid professionals who met for a day and a half to discuss what was wrong with the educational loan system and how a new system might look. We emerged with a very short list of recommendations that enjoyed majority support and featured one important idea: Create a single loan program.

A single loan program ends the confusion families face when trying to unravel an award letter. A single loan program simplifies the borrowing process for students and families by creating a single promissory note to sign. A single loan program carries a single set of terms and conditions that should be much easier to understand than the array that exists today. A well-conceived single loan program eliminates the need for private loans. A single loan program eases the administrative burden for colleges and the federal government. What was true in 2006 seems also to be true today.

So just what does the single loan program look like? Students can borrow up to the cost of education minus other aid in their own names and without a credit check. There are no origination fees, so they receive what they borrow. The interest rate is market based and begins accruing immediately. No loan payments are expected until after graduation. The idea of an annual limit is gone. If there must be a lifetime limit, it should be high enough to allow a student who has only the options of work and loans to borrow enough to pay the full cost of attendance at the average four-year public institution.

Colleges should be able to limit what one or all students can borrow when there are legitimate reasons to do so. For instance, a student living at home and attending a community college could have loans limited to the cost of tuition and fees only. Or a student enrolled half-time might have their borrowing limited to 50 percent of full-time eligibility.

Repayment should recognize that recent graduates are unlikely to make as much money as they will later in their careers, and so payment amounts should be lower in the beginning. After a reasonable time, a debt should be considered satisfied even if not fully repaid. You could argue we have a good foundation for these latter recommendations in the various forms of income-based repayment available today. But the best repayment plan would be to use the full power of the federal government to make it part of the payroll taxation process for those who borrowed. A percentage could be determined and applied to every payroll check just like income tax, FICA, and Medicare taxes. Think of all of the problems this would eliminate for borrowers and for the government.

It is time to put aside all of the wrangling about things that do not help students pay their college bills and enact public policy that increases the number of college graduates and assures them a better future. A federal loan program should first and foremost be considered a financial-aid program. As such, it should be seen by college students as a good thing.  One student, one loan!  What an idea.

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