One Loan: It’s Really that Simple

  Perspectives - Masthead 

By Rick Shipman 

 

During the several federal student loan panels I have participated in the past two years, one issue has always emerged: the “one loan program.” Although the idea of a single federal student loan program has strong support among some financial aid professionals (and many believe it would have strong support with families), it has not gathered support at the federal level. What do those in the financial aid trenches see that lawmakers do not? Conversely, what do lawmakers see that financial aid professionals might be missing? 

The proposed one loan program: 

  1. Combines the Federal Direct Loan, the Federal Perkins Loan, the various health professions loans (and perhaps even the Teach Grant) and the Graduate PLUS Loan into a single unsubsidized loan that is available to students enrolled at least half time at eligible institutions. (It would not eliminate the Federal Parent PLUS Loan, which would remain completely separate.)
  2. Sets annual and aggregate borrowing limits sufficiently high to allow students to cover the cost of education, whether at the undergraduate or graduate level and whether at a public or private institution. This is an important aspect of the one loan program because current loan amounts, while reasonable for some students at some schools, are too low for many students at many schools. Unless these limits are increased under a well-conceived federal loan program, students will continue to turn to private loans, credit cards, excessive work hours, and other alternatives that thwart quick degree completion.
  3. Continues to allow schools, especially community colleges, to set a lower maximum borrowing limit if they believe a lower limit is appropriate for their students.
  4. Includes forgiveness provisions for borrowers who work in professions that Congress determines (subject to regular reassessment) are in the national interest to be subsidized in this way. 
  5. Uses income-based repayment and collections through the federal payroll tax system. 
  6. Bears a modest interest rate that is set annually for the life of the loan.

The one loan program greatly simplifies the financial aid award notice for borrowers and their families. It provides only one set of terms that can be much more easily explained and understood than the confusing terms and options found in the existing panoply of loan programs. It also means borrowers have only one promissory note and one entrance and exit counseling session to complete. A single repayment plan results from a single loan program, further simplifying the process for borrowers. 

The one loan program is also easier to administer and would lower the cost of administration at both the federal and institutional levels. Savings are difficult to estimate, since the federal government does not directly compensate institutions for the costs associated with running the federal loan programs, but the streamlined nature of one loan is likely to save both schools and the government millions of dollars. For example, one loan streamlines awarding by eliminating all of the references to other loan programs; it streamlines disbursement by eliminating the duplicative promissory notes and terms and conditions statements currently required for the different loan programs; and it streamlines collections by focusing on just a single loan repayment.

With so many clear benefits, why don’t we already have one loan program? One reason may be historic political backing for existing loan programs. If a member of a political party had introduced or promoted previous legislation supporting a specific federal loan program, they would find it difficult to support legislation to end that program. Another factor may be pressure by some higher education groups to discourage increased student borrowing capacity. This perspective stems from two assumptions: 

  1. Increased loan limits will lead to increased cost of attendance and force additional borrowing, and
  2. Keeping loan limits down will lead to additional gift aid dollars from the federal and governments or schools. 

A 2014 U.S. Government Accountability Office study released this year found no causal relationship between student loan limits and cost of attendance. Similarly, there is no reason to believe that a single loan program would increase the cost of attendance or that reduced loan limits would lead to additional gift aid. In fact, many in the financial aid profession have witnessed the negative effects of reducing access to student loans, as students often bridge the tuition gap in detrimental ways. For example, they enroll in a reduced credit load to lower tuition, which makes their loan money go further but ultimately extends their time in degree and increases their overall debt. They to attempt to borrow private loans, which are often more expensive and/or are out of reach for students who cannot get a cosigner or show adequate ability to repay. They charge education costs to their credit cards with no safety nets and extremely high interest rates. They work excessive hours to pay for tuition, reducing study time and threatening their ability to succeed in attaining the education they are paying for. And they sometimes simply drop out. Clearly, reducing access to federal student loans is not the best for many students.

Numerous higher education groups have proposed a one loan program over the past several years. Perhaps Congress simply has not given enough attention to this issue to recognize the program’s benefits. Cutting institutional and federal administrative burden and costs makes sense, especially when it achieves the more important goal helping students and families make informed decisions about financing their education, and better manage their student loans. A one loan program would achieve all of those goals.

Rick Shipman is director of financial aid for Michigan State University. 

What do you think of a one loan program? How might it affect students and families at your institution? Do you foresee any problems in moving to a single federal loan program? Please join the discussion below. Your comment will appear with just your first name and last initial. 

 

19 Comments

  • Congress will pay attention if they know it can win them votes and/or if a real savings can be found in such a program. Otherwise, we will continue stick with the status quo.

  • The only way I support a one loan program is if ED can somehow figure out how to put every loan for a student with one servicer and/or if students can transfer their loans to one servicer. Explaining the different loans is difficult enough now; it is also difficult to help a student figure out that they have to contact three separate servicers once they go into repayment. I think we as FAAs need to market not only the consumer benefits of this idea but also any economic benefits for taxpayers.

  • Well written Rick. I think their could be room for controlling tuition by using triggers to limit loans. Perhaps default rates, employment rates of graduates and completion rates could factor in caps for school providing little opportunity for their students..

    It is clear that ED, by requiring loan data under the 150% Stafford limit for loans that are not impacted by the limit, is looking for ways around the Single Unit Record Database prohibition, Consequently they have much more data than ever to use in evaluating loan effectiveness.

  • The 150% subsidized rules add a barrier of confusion for low-income students. When FAAs can barely explain the rules, you know there is a problem. Why not be completely transparent with students and offer them one loan product that is very clear and can easily be explained to the student and their family. Mr. Shipman's article is right-on.

  • Since the introduction fo the 150% Subsidized Loan Limit, there's very disagreement among financial aid administrators that it's only a matter of time before the Federal Direct Subsidized Loan program is cancelled. What concerns me is that unless the Perkins Loan is maintained, there will be no remaining low-rate loan program for high-need students. I'd be in favor of a one loan program, but only if the Federal Perkins Loan is kept as campus-based aid and funding for program increased.

  • The Perkins loan is an invaluable tool to help needy students in special circumstances for whom the PLUS is not an option or the PLUS denial does not cover the bill. Keep the Perkins, and eliminate the subsidized Stafford. The Health professional loans are very cumbersome to administer and could be eliminated.

  • I agree, with every point Mr. Shipman made. Would love to see this happen...it just makes sense and would benefit all parties involved.

  • Easy to get means easy to forget. Employers will fight the payroll withholding repayment piece. This said, a single, multipurpose loan program would be better than what we have today.

  • Quite honestly, I used to not like the idea because it took away the subsidized loans. However, seeing the changes that have taken place the last few years, the 150% subsidized loan limits, etc. I agree the time has come! Let's cut to the chase and get it done!

  • Rick, thank you sir; great assessment. Ok, so we seem to have industry buy-in for the most part. How do we mobilize to craft this legislation? What do we as industry experts (the technocrats) do to support and move this forward. Access to higher education (without post-graduation "indentured servitude") is in many ways becoming a civil rights issue. A sustainable model for human capital investment is a question of national security and just good business. How do we move forward?

  • I think the major advantage of a one-loan system is consumer transparency. Taking out a new set of multiple loans every year forces borrowers to do research and calculations to answer to the most critical question in determining appropriate borrowing choices, i.e. "How much will my monthly payment be?"
    A Truth-In-Lending statement is confusing and useless to someone who lives month-to-month, paycheck-to-paycheck, and needs a "real" number to budget with. And considering that many student loan borrowers are not yet financially independent and have limited understanding of financial mechanisms when they take out these loans - we've got to make it much, much more simple.

  • Dick B
    I appreciate the article by Rick and support his comments. And as John G says, it is " an idea whose time has come". This is big picture and forward thinking which makes sense for students and the institutions that educate them. We need to get this in front of some legislative individuals that will support a better overall loan program for students and offer cost savings over the existing loan programs.

  • An interesting plan, and I do see and like some of the advantages of it. But what about runaway tuition at some schools? With the ability to have student loans that scale to the COA, what will persuade some schools from allowing dramatic increases to tuition & fees to continue?

  • You can add my name to the list of people that would support this new loan program.

  • Rick's overview here is an excellent description of where the profession is currently at. Communicating the message to those on the Hill as well as in the White house is the challenge for the next several months. A unified message conveyed early and often but both NASFAA and the Regional ASFAA's is needed. The ASFAA's have no political message, only one that as the end users and the parents and grandparents, neighbors and friends of the students have a good understanding of what works and is best for the students and taxpayers.

  • The fact is that those increased borrowing amounts are already occuring, but are much less regulated. They are being taken as private student loans, which inevtiably require higher credit worthiness, have higher interest rates, and have more difficult repayment options. The only advantage to private student loans is the competetiveness factor, which can reduce interest rates. If the Federal Direct Loan would be a competitor for these private loans then it would only serve to help reduce those costs. I believe in the one loan model, but I believe it must allow schools to set reasonable limits based on actual costs and not the over inflated cost of attendance models that we often have to deal with. What more, we must continue to strive to improve the need based grants available to students and government support of higher education, on both the state and national levels. Increased student loan availability isn't a major factor in increasing the cost of college, but reduced financial support at the state level is.

    Ken Cole
    SC

  • I agree wholeheartedly with all of Rich Shipman's points! Also, though probably not a selling point for politicians, a one loan program would eliminate the need for the 150% Subsidized Limit boondoggle.

  • Sure there would be opposition from those who see the subsidized and Perkins loans as interest cost savings for students, but who are we fooling, its only time before the interest subsidy or the programs themselves disappear. One must look at the big picture. There are just too many good selling points in a one loan program. I agree with John G. its time has come!

  • An idea whose time has come. I am not sure how to get buy-in from politicians though.

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