While there have been calls to return to the Family Federal Education Loan (FFEL) program, that may not be the best way to address inefficiencies in the federal student loan system and reduce student loan debt nationwide, according to a new paper from the American Enterprise Institute’s (AEI) Jason Delisle.
Delisle, a resident fellow at AEI’s Center on Higher Education Reform, explores in his paper the similarities between FFEL and its 2010 replacement, the federal Direct Loan program. The programs, he writes, “are really two different designs of the same government-backed student loan program that entail the same kinds of financial risks for taxpayers.”
Some argue that FFEL reduced the financial risk to taxpayers and students, and that returning to the program would bring about budgetary savings, because the program would allow loans to be made only to credentials that provided a positive return on investment or by adjusting the terms of the loans based on risks. Some also argue that the switch to direct lending has contributed to the high levels of student loan debt and default in the U.S.
Delisle, however, disputes these claims in his paper, noting that the federal government under both loan programs “makes students legally entitled to loans at the same terms set by the government regardless of student risk profiles or the colleges and universities they choose to attend.” Furthermore, the government “is on the hook” for the entirety of the cost of making those loans under both FFEL and the Direct Loan program.
But there is still a role private capital can play in the student loan arena, if the government would restrict the amount certain loan programs lend to borrowers, including eliminating Stafford and PLUS loans to graduate students and eliminating Parent PLUS loans for parents of undergraduates, the report said. These groups “have had a chance to establish earnings and credit histories and, in the case of graduate students, earn college degrees, making them good candidates for purely private loans,” Delisle writes.
During an event to coincide with the release of Delisle’s paper, Manhattan Institute Senior Fellow Beth Akers said that another way to improve the federal financial aid system would be to simplify it on the front and back ends, offering student borrowers “one loan with a single repayment plan, with the default being an income-based repayment plan.”
James Bergeron, president of the National Council of Higher Education Resources, said that the “overall issue is that federal policymakers need to focus on is whether or not the federal government is running a student loan program or a student assistance program.”
There also needs to be a conversation about the role states play in higher education financing and how institutions are held accountable for student loan borrowing, Bergeron said.
“I do think if you’re going to hold colleges accountable for their default rates, or whatever metrics we come up with, you have to recognize colleges need to have some ability to affect those default rates,” such as by placing restrictions on student borrowing, he said. “There’s going to have to be some kind of balance.”
“The impetus for the [federal loan program] is there wasn’t a private market,” Delisle said at the event. “And now we’ve come so far I think the federal government is crowding out the market.”
Bringing private capital into the student loan market “adds value by precluding universal access to student loans at universal terms,” Delisle writes in his paper. “If policymakers believe the most important goal is to provide widespread access to loans at terms the government sets, then there is nothing private capital can offer the Direct Loan program.”
Publication Date: 2/16/2017