Kerry Proposes Reforming FFEL to Fund National Service Initiative

Democratic presidential candidate John Kerry unveiled his plan for reforming the Federal Family Education Loan (FFEL) program during an April 14 campaign stop at New York's City College. The plan is a component of the Massachusetts senator's "Compact with the Next Generation," which aims to engage more than 500,000 young Americans in national service each year within a decade.

According to an accompanying news release, the plan will "offer young Americans affordable education in return for serving their country, and in keeping with Kerry's commitment to fiscal responsibility, will be fully paid for by the elimination of the guaranteed profits banks currently make on student loans."

Kerry has proposed that young people who agree to serve as teachers, police officers, tutors, and in other key roles for two years would receive four-year tuition at a public university. The plan would also expand aid for students already in college who opt to serve by tutoring and mentoring K-12 students.

Kerry said his "Service for College" initiative will involve more than 300,000 students within a decade. He has proposed paying for the national service program by overhauling the student loan system.

The Kerry camp noted in the release that the student loan program currently "guarantees billions in profits to banks at taxpayer expense," through student payments, government subsidies, and government guarantees against default.

Kerry faults "political forces in Congress, not competitive forces in the marketplace," for setting bank subsidies at rates as high as 9.5%. Kerry has pledged to "overhaul guaranteed student loans to save taxpayers billions, without making students pay one penny more."

In particular, Kerry's loan reform plan would:

• "introduce market forces by requiring banks to win student loan contracts by bidding at an auction."

• eliminate windfall profits from changing interest rates. When student interest payments fall short of the federally guaranteed 3.4% loan rate, the government makes up the difference. Conversely, when student payments exceed this rate, lenders get to pocket the extra money. Kerry has proposed eliminating these lender windfalls, saving an estimated $12 billion (according to Congressional Budget Office estimates).

• eliminate excess subsidies on tax-exempt funding. According to Kerry, "some lenders are able to manipulate the Higher Education Act to receive a 9.5% interest rate. In 1992, Congress began phasing out these large subsidies, given to loans backed by tax-exempt bonds, but their cost continues to rise." Kerry would end these extra subsidies "once and for all," saving $2 billion, (also according to CBO estimates.

By Elizabeth B. Guerard
NASFAA Assistant Director of Communications

Posted April 15, 2004 on www.NASFAA.org, the Web Site of the
National Association of Student Financial Aid Administrators (NASFAA).
Copyright 2004. Redistribution to non-NASFAA institutions is prohibited
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