October 4, 2007

Education Dept. Will End Program Credited With Averting Loan Defaults

The U.S. Department of Education has announced plans to end a program that its supporters say has helped drive down the default rates on student loans.

Under the program, the department reimburses a select group of guarantee agencies on the basis of their success in averting defaults, rather than on the basis of their collections on defaults. Congress created the program in 1998 to encourage guarantee agencies to focus more of their efforts on preventing students from defaulting in the first place.

But Congress also required that the program be “cost neutral,” and the department estimates that it will cost the federal government $2-billion over the next 10 years, even taking into account the savings from default reductions. The department says that it has no choice but to end the program, given its cost.

Some members of Congress are fighting the department’s decision, saying it will cause default rates to rise. On Monday, Democratic leaders of the House and Senate education committees sent a letter to Secretary of Education Margaret Spellings urging her to reconsider. —Kelly Field

Comments

1. Why does no one report that the Department of Education and its guarantors MAKE, not lose, ALOT of money from defaulted loans?

   In 2004, John Hechinger reported in the WSJ that for every dollar the Department of Education pays out in default claims, it gets back $1.20 .

   Furthermore, guarantors would barely exist were it not for defaulted loan revenue.

   The Department of Ed loves defaulted loans. Guarantors and collection companies love defaulted loans.

   Everyone is making money from defaulted loans except the borrowers who typically wind up paying double, triple, or often far more than than they originally borrowed.

   This is wrecking the lives of decent citizens, and all parties involved, particularly staff at the Department of Ed should be ASHAMED of themselves.

   We can only hope that the new president will clean house within the Department of Education, and install people who care about the welfare of the borrowers, as opposed to the welfare of the lenders and guarantors.

   The current bunch see it as their job description to extract as much money as possible from misfortunate borrowers, and they have the cover of law to operate beneath. This is destroying lives of decent citizens, forcing them off the grid, out of the country, and even into suicidal situations…and for what? STUDENT LOANS??!!!

   HOW SHAMELESSLY PERVERSE IS THAT?

   This Department is out of control. I think Ron Paul may have it right when he talks about abolishing it altogether.

   — Alan Collinge    Oct 4, 03:24 PM    #

2. Here, here, Alan! What a sham this department is and their banking cronies who make millions from it. Ironically, it is costing the taxpayers of the U.S. $4,000 A SECOND to continue our operations in Iraq. Why doesn’t the DOE ask the Pentagon to stop the war for 4 SECONDS EVERY DAY to pay all student loans that have been defaulted through disabilities, bankruptcies or other legitimate reasons. Is there a mathematician out there to calculate how many seconds the war needs to stop to pay for all student loans?

   — steve    Oct 4, 08:15 PM    #

3. Guarantors should be compensated for collecting defaults at cost. No one should be making money off defaults. It’s simply bad policy. Now do the VFA’s cost more? If you play w/ the numbers long enough, you can get them to say whatever you want. They should not be excessive, but if the cost more now, they should still be the guarantor model as not all good policy is cheap…and the cost reduction should be worked on, like anything, over time.

   — Michael Sessa    Oct 4, 10:14 PM    #

4. How can the Department be serious about its commitment to lowering student loan defaults when it proposes to end Voluntary Flexible Agreements? The Secretary’s decision to terminate the VFAs is shortsighted, ill-timed and bad public policy. In a time when rising student loan amounts, the higher cost of living, and a shaky housing market are all converging to create a perfect storm of debt for tomorrow’s college students, the Secretary has decided to end a program that has proven successful in helping student loan borrowers avoid default and maintain good credit. We’d all like to see students’ reliance on loans lessen, but it is unrealistic to expect the issue of student debt to be eliminated — particularly as loans have now become the primary component in the federal aid program. As such, we have an obligation to the public to assist students and families learn how to manage this debt. Federal student loan guarantors operating under a VFA offer the best solution to help the federal government meet this challenge. As local, neutral third-parties, they are in the best position to provide the public with information and assistance necessary to successfully finance a college education. It is also incorrect that VFAs are not cost neutral. The Department should be required to clearly explain the methodology for arriving at this cost estimate, as they have not shared this information to-date.

   — Shelley Saunders    Oct 8, 12:16 PM    #

5. This is a bad decision against the students the Department is supposed to help. The VFAs place student success as their goal. Their counterparts, however, have reason to celebrate when students default on their loans, ruin their credit and then rehabilitate their defaults via a series of organizations united through vertical integration. The Department of Education’s desire to require that all guarantee agencies profit off student failure is a contradiction to their charter and purpose. Although students have justification to complain about this directive, the Sallie Mae executives will be pleased with this decision as this should help them in their struggling effort to sell their business for an offensive profit.

   — Thomas    Oct 9, 04:38 PM    #

6. This dilemma frightens me. I am the recipient who is in default of two student loans and I am at my wits’ end! I filed bankruptcy two years ago. I had no idea it would come to that. The cost of living for me became a horrible struggle just to buy food and maintain my vehicle just to be legal. Florida is so behind in wages and healthcare. I was living from paycheck to paycheck. I have disabilities from birth and even SSI drags out my applications. I wait and I wait. I get food stamps now and I am three months behind on my cell phone. That means, if I don’t pay them, they will shut me down and charge me an additional $200 plus what I owe and I will be disgraced once again. I spoke to an attorney and he tells me the collectors from the defaulted student loans will take my disability payments (if I am approved for it), too. If I go back to work, they will steal that, too. They already stole my tax refunds twice even though I was not working. Here, I had surgery done on my spine. They did not care. They keep calling and asking for money. They said they just need $5.00 a month and I told them, “I have only change in my wallet, sometimes nothing. I am tired of them insulting the poor. They ruined my credit – hell, I HAVE NO CREDIT!!! I will never be able to get a mortage, a new car, or even rent a car; all because of defaulted student loans!! I have been ruined by my own country! As a witness, I bitterly watch our country cater to the aliens, but “railroad” their own born American citizens. What is the worse sin of it all, our government is allowing businesses to outsource their products, leaving the American worker empty-handed. What can I do? I am just a little ant among many?

   — Linda V. Vassie    Oct 15, 08:50 AM    #

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