Student loan group lashes out at Obama proposals

Wed Oct 26, 2011 3:53pm EDT

NEW YORK (IFR) - President Obama's proposed student loan repayment relief programs are too narrow, a group representing nonprofit and state agency student finance organizations said Wednesday.

"We are disappointed by President Obama's 'Help Americans Manage Student Loan Debt' proposal," said the Education Finance Council (EFC) in a prepared response. "By focusing only on a limited group of students, the proposal does little for borrowers struggling to repay student loans in today's distressed job market."

"President Obama's proposal, available to a limited group of students for a limited amount of time, does not address the real student loan problem: rising tuition and the lack of well-paying jobs," the group said.

The US Department of Education said approximately 5.8 million borrowers may be eligible for the new loan consolidation program.

The president's new plan is designed to make it easier for students to repay their loans, including allowing student borrowers who have both private-sector loans under the Federal Family Education Loan Program (FFELP) and US Department of Education loans to consolidate into a single loan through the government's direct loan program (DLP).

Additionally, the president is expected to introduce a modification to the income based repayment (IBR) option, the so-called "pay as you earn" proposal. While legislation in 2010 lowered the payback cap to 10 percent of a borrower's disposable income starting in 2014, the "pay as you earn" proposal accelerates the timing, starting the 10 percent cap beginning in 2012.

The new consolidation program is slated to run from January 1 to June 30, 2012, and "certain" borrowers taking advantage of this program may be eligible for an interest rate reduction of up to 0.5 percent. The EFC says that the six-month window of opportunity is far too short, and that the program only caters to students currently enrolled in school that took out their first loan in or after 2008 and will take out another loan in 2012.

Delinquent borrowers are not eligible at all.

"The loan-shifting plan needlessly usurps student loans from nonprofit and state agency student lenders; which will cause many borrowers to lose valuable borrower benefits offered by these organizations," the EFC said.

FFELP ABS prepays to increase

Prepayments on student-loan asset-backed securities backed by the FFELP program are likely to increase due to the president's latest announcement, but only for those transactions collateralized by borrowers with both FFELP and so-called direct loans from the government, according to analysts at Barclays Capital.

Direct government lending hovered between 20-30 percent of total government guaranteed student lending since the inception of the direct program in 1993, Barclays said today. However, with implementation of the Affordable Care Act, as of July 1, 2010, federal student loans were originated only through the DLP.

Schools generally gravitated toward one program or the other until it became clear that federal loans would no longer be originated by private entities. As such, many borrowers exclusively have either FFELP or DLP loans, Barclays said.

However, according to the US Department of Education, approximately 5.8 million borrowers have both types of loans and, thus, may be eligible for the new consolidation program.

"Any pickup in prepays will be beneficial for discount dollar-priced FFELP student loan ABS (eg, 2010 and pre-2008 vintages) and detrimental to premium dollar-priced FFELP ABS (eg, 2008 transactions)," wrote Barclays ABS researcher Joseph Astorina.

According to Fitch, student loan ABS transactions issued before 2006 are less vulnerable to the new changes due to the massive consolidation wave that occurred between 2003-2006.

Transactions issued in 2009 and after often benefit from a more robust structure, the rating agency said on Wednesday.

However, FFELP transactions issued between 2006 and 2009 have a greater reliance on future excess spread, which could be negatively affected by a significant increase in prepayments.

In addition, since delinquent borrowers will not be eligible to consolidate their loans and higher quality borrowers will, FFELP student loan ABS pools may be left with higher concentrations of lower quality borrowers, which may further reduce the excess spread available to the transaction.

"The changes may also introduce incremental servicing risk for FFELP transactions that are serviced by entities that have not signed up for the Direct Loan servicing program, as their portfolio could shrink and the economies of scale reduced," Fitch said.

(Adam Tempkin is a senior IFR analyst)

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Comments (10)
sgreco1970 wrote:
“”President Obama’s proposal, available to a limited group of students for a limited amount of time, does not address the real student loan problem: rising tuition and the lack of well-paying jobs,” the group said.”

That’s right. that’s because the president isn’t in control of your tuition, your university is. And the president certainly inst in control of corporate hiring -corporations are.

The president IS, however, in charge of FEDERAL STUDENT LOANS and he’s trying to make it simple for YOU to PAY THE TAXPAYERS BACK for the $610 billion worth of outstanding student loan debt YOU are not paying back.

I do think students today do need a lashing, but not in the manner this report expresses…

Oct 26, 2011 4:17pm EDT  --  Report as abuse
Silkster wrote:
Heck, why not free college in this socialist environment!!! Might as well go whole hog eh comrades? And while we’re at it, how about just forgiving all those mortgages too! How about a free house and free new car? I think we’ve paid for one already from GM but I haven’t gotten it yet.

Oct 26, 2011 4:17pm EDT  --  Report as abuse
Greg2011 wrote:
I think this is a great idea, but I didn’t hear anything about people who are almost done paying off their loans receiving money back… I’d like to hear something about that. I’ve been bogged down for year paying $10,000′s of dollars in student loans. In a few months they’ll be gone for good. I’d like some of this back now since I’ve struggled to pay for all these years. Since other people won’t have to struggle like I did, where is my check Obama?

Oct 26, 2011 4:18pm EDT  --  Report as abuse
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