Sen. Reed Introduces Direct Loan Risk-Sharing Bill

By Joan Berkes, Policy and Federal Relations Staff 

Sen. Jack Reed (D-RI) has introduced a bill that would impose a financial penalty on institutions when students default on federal student loans. The bill would expect institutions with a minimum 25 percent Direct Loan participation rate among its enrolled students to share the federal government’s risk on student loans. Risk-sharing would mean payment to the Department of Education of a percentage of the school’s defaulted loan volume. The percentage of this “rebate” would vary from 5 to 20 percent, depending on the institution’s default rate.

Schools with default rates under 15 percent would not be subject to risk-sharing penalties. Schools with default rates above 15 but lower than 20 percent could receive a waiver of the risk-sharing penalty under certain conditions. An institution with any default rate subject to the rebate could reduce its rebate percentage by implementing an approved student loan management plan (which would have to include individualized financial aid counseling for students) and demonstrating its effectiveness.

The volume on which the rebate to be paid by the school would include interest and collection fees, but it is unclear whether the penalty would be based on the loan amount originally made or on the amount of outstanding loan that is in default.

The bill would prohibit schools from denying admission to students based on perceived risk for default. The bill does not appear to alter the institution’s ability to deny or reduce loans based on current professional judgment authority. 

Half of the funds collected from institutions under this risk-sharing concept would be used for delinquency and default prevention or rehabilitation, and half would be reserved to help offset future funding shortfalls in the Pell Grant Program.

 

Publication Date: 5/12/2015


Mark L | 5/12/2015 7:31:38 PM

The bill ignores reality in at least four specifics. First, the odds of defaulting are highest among those who fail to complete a degree. However, these borrowers tend to have relatively low debt. Therefore the amounts recovered would likely not cover the cost to run this program.
Second, as a wise financial aid director told me years ago, a single default among her students - who had a low rate of default - would cost the Direct Loan Program more than defaults among 10 community college students in her state.
Third, with more students attending multiple institutions on the path to a degree, why should the last in the chain carry the burden? Or have I misunderstood how ED calculates CDRs?
Fourth, as ever, it likely is true that defaults during the CDR tolling period begin on the first day following the end of the grace period. However, at least for those borrowers who complete a degree, how responsible can a school truly be for the student's failure to pay his or her monthly bill?
Finally, going back to #1 and #4, the real issue is that for those who default, without a degree, the default is a triple disaster. No degree, to improve earning power. A ruined credit rating - affecting housing, transportation, and employment options. Exclusion from future financial aid, all but barring re-entry into higher ed. Perhaps a law mandating free tuition for x credit hours for these students at the original institutions would be a wiser and ore workable idea.

Peter G | 5/12/2015 5:9:23 PM

I mentioned this in my white paper feedback to Sen. Alexander, but one core problem with these measures is that they assume CDR is representative of financial loss to the government, which in many cases it is not.
Not that it's the only problem, but it's a problem. If someone were actual serious about this, you'd have to do a couple things:
1) discern what the govt's actual projected 'loss' is based on CDR
2) consider that covering that loss is in part why we charge fees and higher interest rates
3) lower the fees and interest rates accordingly.

Raymond G | 5/12/2015 12:37:17 PM

Bad idea. Once again proof that politicians don't have a clue what we deal with. If they really wanted to lower the default rates and help students they should prevent students who place into developmental / remedial courses at community colleges from getting student loans. Tuition costs are already extremely low. There is no reason why they should take out loans and be $25,000 in debt before they even take a college level course at a community college. Make the remedial courses free but ineligible for financial aid and put the money saved into secondary education.

Nathan E | 5/12/2015 12:10:35 PM

A law like this will result in many Community Colleges leaving the loan program all together since almost all are already above a 20% default rate and with tight budget times won't want to risk paying penalties.

Robert P | 5/12/2015 11:33:27 AM

I agree with Richard S. Schools should also get profit sharing. Education increases their life-time earning ability so we should get part of their federal taxes. Sliding scale of 5 to 20 percent of taxes paid should go back to the colleges.

Lynn T | 5/12/2015 11:30:47 AM

We are not allowed to require yearly entrance counseling and budget worksheets as these 'prevent' students from receiving their entitlement to student loans. We are a California Community College where a high percentage of our students receive a fee waiver so have no tuition expense; yet still want the maximum loans. These funds go directly to the student, not our institution. Everything we put in place with our default management plan a few years ago is not 'allowed' because it prevents the entitlement to loans, yet our institutions are considered responsible for the default rate. We have a staff member who calls students in delinquency status, the number of students she actually reaches is small - many won't answer/hang-up on her, etc. One student she attempted to contact via email/mail/phone 42 times before she went into default. There needs to be more authority in allowing/requiring financial literacy components to the loan process.

Raymond H | 5/12/2015 11:2:55 AM

What politicians and people seem to forget(or wish to ignore) is the fact that schools do not have crystal balls. You could enroll a great student who is fiscally responsible and driven, who because life gets in the way, is unable to repay his/her student loan. In addition, any professional involved in education knows that the attitude of the students has changed over the last 10 years and most students only care about the finances to get through school and don't look ahead to the long term. Should we blame our senators when legislation that his constituents desire does not become law? Maybe they should be held responsible for lost state funding and pay that out of their own pockets!!!

Susan F | 5/12/2015 9:28:20 AM

Such a program already exists with an infrastructure, proven history and is somewhat funded. it is called the Federal Perkins Loan program which requires has always required institutional match. We don't need to create yet another loan, just keep Perkins as a subsidized loan program and expand it.

Richard S | 5/12/2015 9:20:29 AM

Maybe somebody will introduce a bill that provides for profit sharing between the federal government and the school for students who properly repay their loans. That seems like a reasonable next step if schools have to share losses due to defaults.

Theodore M | 5/12/2015 8:32:09 AM

The feds deciding who you can admit sounds like a great idea.

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