This week's Q & A focuses on details about how student loans would be changed under our proposal.
What will the annual loan limits be? How are loan limits for graduate and professional students treated?
The maximum annual loan limit for undergraduates of any grade level would equal the maximum Pell Grant award for the same period ($12,900), not to exceed cost of attendance minus other aid. The annual loan limit for graduate students would not exceed the cost of attendance for the period, less other student aid.
The big difference in loan limits is the elimination of annual limits that change according to grade level. The current system offers lower loan limits for first- and second-year students (ostensibly to reduce their borrowing) but it doesn't work that way in practice - since grant aid isn't increased in the first years of school to offset the decreased loan limits. In fact, research has shown that inconsistent loan limits have led to increases in private loan and credit card debt and actually deters low-income student enrollment. With sufficient grant funding as a base, loan borrowing should drop - but the goal here is also simplification and predictability, so that students can easily understand their eligibility.
Currently, graduate students can borrow up to the cost of attendance minus other aid but need to go to the Grad PLUS program if the unsubsidized limits are insufficient. Under our proposal, these students could borrow all of their need through one unsubsidized loan program.
I'm curious as to where PLUS loans fit into all of this. Would it work the same way as this new loan?
Parents of dependent students would still be able to borrow a parent loan up to cost of attendance. Independent students or students whose parents are denied a parent loan will be able to borrow 150 percent of the annual loan limit each year.
The loan program would offer students a low, fixed interest rate. Do we know an approximate interest rate? How often will it be reviewed and recalculated?
We've targeted 3.4 percent as the low, fixed interest rate since Congress has already mandated that interest rate on subsidized Stafford loans.
What is NASFAA's position on the Operation PUSH proposal to have a 1 percent interest rate for student loans? If we as Financial Aid Officers are truly representing the interests of our students first, I cannot imagine why NASFAA and member institutions would not be pushing for a 1 percent interest rate on all federally backed student loans - regardless of what the program is called.
We support the lowest possible rate that maintains a viable program. The only purpose for having an interest rate on federal student loans is to cover the costs of administering the loans, maintaining their respective benefits, and to provide a small but safe return to investors in the Education Finance Bonds we have proposed.
I disagree with the notion that students from poor families should not be expected to borrow to help fund their education. The expectation of repayment of a student loan does not lie with the family's income while the student is in school, but rather with the student's ability to repay the loan after graduation. For instance, the student from the poor family who graduates with an engineering degree would have the same earning power as the student from an upper middle class family who graduates with the same degree. Therefore, why is if felt that the student from the poor family could not afford to pay back a loan?
Low income students are much more debt averse than moderate- and upper-income families. And students with a high level of debt aversion - which is a sensible attitude when not assured of ability to repay - are most likely to drop out. Research is replete with studies that show that loans have little impact on college access and much less impact on college access than grants and tuition waivers. In fact, they not only fail to improve college access, studies show that loans may actually discourage enrollment. Student loans are unlikely to help the nation close the gap in college participation between rich and poor.
We agree that every student and family, no matter their income, should be expected to prepare financially for their college education. Research shows that all students who save for college - no matter how little - are more likely to attend. We would increase students' ability to help pay for college up front through savings accounts that are leveraged with both public and private money.
By eliminating subsidies and moving benefits to the repayment phase, we in fact recognize the argument that a borrower's ability to repay is largely determined by their financial condition after leaving school. With income based repayment, in the example you gave of two students making the same salary after college, their monthly payments on a loan of equal amounts would be the same, thus equalizing their responsibilities after education is achieved.
Do you actually think in today's economy that increased grant monies will reduce student borrowing?
Yes and the case studies in Appendix B of the report demonstrate how this would work. In addition, the availability of a simpler, less costly federal loan program will keep students within the safety of the federal program and tend to reduce borrowing from private loans and credit cards.
As a branch campus that runs a Transfer Only, School of Nursing, I am very concerned about the lack of options for my students if FFELP is eliminated. Nearly 30% of my students enter with a prior degree so they do not get Federal or state grants. As transfer students, many of them have prior loan debt and we have to be concerned about the cap on the Stafford loans. The only recourse for them is alternative loans. If FFELP is eliminated and private lenders can only provide alternative loans which carry more risk, I doubt many of them will continue to offer such a product. And without that option, our attempts to alleviate the nursing shortage will be for naught as I would expect we would have to close down. Does your new proposal consider the situation involving alternative loans?
Let us clarify that we are not eliminating all federal loan programs; we are proposing a different single federal loan program with many of the same advantages that the current FFEL Program offers. We are not eliminating FFELP and leaving private loans as the only alternative.
Our proposal would help your students in a number of ways. First, they would, in the aggregate, come in to your school with less prior loan debt to begin with. Second, under our loan proposal, the loan maximums are raised to keep students within the safety of the federal loan programs. The maximum annual loan limit for undergraduates of any grade level would equal the maximum Pell Grant award for the same period ($12,900), not to exceed cost of attendance minus other aid. The annual loan limit for graduate students would not exceed the cost of attendance for the period, less other student aid.
Third, our proposal would restrict the TEACH Grant to graduate students, and expand it to four more critical shortage/high need areas (to be determined by individual states); nursing would be a very likely candidate. And finally, there are better borrower benefits during repayment such as income-based repayment and incentives for loan forgiveness.
Under your proposal, would a school's loan default rate still affect a school's eligibility to participate in the Title IV programs? What is NASFAA's position on the issue of the penalization educational institutions for the Default Rate of students it serves? Any discussion of NASFAA's position or recommendations would be appreciated.
Our proposal doesn't address this issue. However, we believe that combined effect on students of our proposal's components - notably income-based repayment - will have a positive downward effect on default rates.
