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would include interest and collection fees, but it is unclear whether the penalty would be based on the loan amount originally made or on the amount of outstanding loan that is in default.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