Sallie Mae Lays Out Alternative Student Loan Model

Here is the letter that went out to financial aid administrators yesterday:

SALLIE MAE, INC.
12061 Bluemont Way
Reston, VA 20190

BARRY FEIERSTEIN
Executive Vice President

April 15, 2009 Dear Valued Customer: As Congress considers the President's FY2010 budget, it is critical for the future of education in this country that the federal student loan programs continue to meet the needs of their primary beneficiaries: students and their families. All of us—the Administration, Congress, higher education institutions, and student loan providers—have an historic opportunity to meet the President's goal of making college more accessible while building on what currently is working for students and their families in today's federal student loan programs. In this regard, Sallie Mae® believes in the following principles: The Pell Grant program is the centerpiece of the student aid system and should be prioritized and enhanced as the fundamental way of making college more accessible and affordable;We are pleased to share this good news as we continue to provide quality service and default prevention initiatives to you, your students and families. Improvements to the student loan program should focus on what works best for students and higher education institutions, including choice, competition and innovation in loan delivery. Institutional choice in loan delivery options produces steady improvements and benefits for students, higher education institutions and taxpayers. Rigorous competition is necessary to avoid freezing one system in place today that will not benefit from continuous improvement. It also allows institutions to transition between systems if needs change or service becomes inadequate; The growing reliance on student loans—expected to total $90 billion in 2010—requires that proven solutions be prioritized. For example, the bipartisan Ensuring Continued Access to Student Loans Act of 2008 was a landmark solution to the unprecedented credit crunch that threatened the availability of federal student loans. In a time of great economic uncertainty, ECASLA allowed Sallie Mae to guarantee that all eligible students who needed a federal student loan received one. The legislation continues to be an overwhelming success for students, parents, taxpayers and the 4,500 higher education institutions that rely on the Federal Family Education Loan Program (FFELP). In addition, the government is generating substantial taxpayer savings derived from using low-cost federal funds while higher education institutions and their students continue to benefit from the competitive aspects of today's student loan structure; The concept of risk sharing produces powerful incentives to reduce loan defaults and should be expanded to all loans; The risks and potential costs associated with the massive structural changes required to transition over 4,500 institutions before July 1, 2010 to a new infrastructure should be carefully addressed and accounted for in any proposed solution; and An open, deliberate and collaborative approach to building broad consensus around the student loan program for the future is vital. These principles have been the foundation for our discussions with the Administration, Congress and the financial aid community to advance the best long-term interests of students, higher education institutions and taxpayers. Rather than focus on the traditional policy debate between FFELP and Direct Lending (DL), Sallie Mae is working to develop practical concepts that constructively serve the best interests of all stakeholders. We believe there is an opportunity to build on the success of ECASLA: funding the loans directly from Treasury and keeping them on the government's balance sheet so the government captures the budget scoring savings derived from loan ownership while also benefitting from competitive private sector involvement in the origination, servicing and collection of loans. For all concerned, it is imperative to reduce defaults. In our view, having lenders and servicers share in the financial costs when loans default, along with the comprehensive programs offered by lenders, servicers and guaranty agencies, are powerful incentives to achieve this goal. A new student loan model should incorporate these concepts to ensure that lenders and servicers are motivated to do more and perform better than pure "fee-for-service" contractors. We believe the best ideas should be considered to assure that the President and Congress generate taxpayer savings to greatly expand funding for the Pell Grant program, that valuable school and student benefits are not sacrificed, and that the inherent and potentially economically problematic risk of transitioning 75 percent of higher education institutions (4,500 institutions) from their current infrastructure is averted. In fact, we have put these ideas into a detailed framework at legislators' request. It is important that we focus on the fact that the vast majority of taxpayer savings in the President's current proposal comes not from eliminating lender subsidies but from the difference between the interest rate paid by student or parent borrowers and the federal government's low cost of borrowing. Indeed, over the past 10 years Sallie Mae has paid more in fees and taxes to the government than it has received under FFELP and the government is currently earning money on all FFELP loans. Upon careful examination, the President's proposed student loan financing structure is very much like today's FFELP structure, as revised under ECASLA. The reality is that private sector lenders already use those lower-cost federal funds, creating billions in taxpayer savings. These billions of dollars of savings, however, were not captured in the President's FY2010 budget plan because ECASLA is assumed to expire on June 30, 2010. More important, as the following Congressional Budget Office table shows, the savings from ECASLA are dramatic. Under ECASLA, FFELP returned $30 billion to federal taxpayers in fiscal year 2009, the only year in the federal budget baseline when ECASLA was in effect for the entire year. Click here to view larger image Working together, Sallie Mae is confident that the President and Congress can achieve the necessary taxpayer savings to meet the President's objectives of making college more affordable and building on the hallmarks of FFELP that work so well for students and higher education institutions. This important policy discussion deserves the input of all of us. Sincerely, Barry Feierstein

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Here are the details of the Alternative Loan Proposal put forward by Sallie Mae to legislators:  Download Alternative Student Loan Proposal_4.9.09.

Here is a quick summary:

• Choice of Loan Origination platforms:  DL or private lenders
• Federal funding for all government loans
  • Eliminate special allowance formulas
  • Pay lenders based on current ECASLA terms; eventually move to market mechanism
• Common loan terms for DL and FFELP
  • I posted recently on the cost to PLUS borrowers at FFELP institutions who pay higher interest rates than those borrowing PLUS loans at DL schools.  
  • Presumably would standardize loan repayment options also.
• Servicing performed by contractors selected through competitive bidding, however, originators would have option to retain servicing if they meet certain criteria
• Default prevention:  a new risk-sharing proposal (not specified in this proposal) to give servicers "skin in the game."  Financial literacy activities and counseling carried out by guarantee agencies. 

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Related articles:

• Sallie Mae proposes alternative to ending guaranteed-loan program (Chronicle of Higher Education)
• Sallie Mae's alternative student lending plan (Higher Ed Watch Blog)