WASHINGTON -- Bankers are applauding a new package of student loan program reform measures, hoping it will give them a better chance of competing with federal direct loan programs.
The Coalition for Student Loan Reform, a group of not-for-profit student loan guarantee and secondary markets agencies, announced the reform package Thursday.
The measures were created to standardize and simplify loan application procedures and streamline other loan procedures in the Federal Family Education Loan Program, or FFELP, through which private lenders make student loans that are backed by federal reinsurance.
"They aim at improving the FFELP so it can outperform the federal direct loan system," Consumer Bankers Association spokesman Fritz Elmendorf said. "The coalition has a number of measures that will help."
The loan reform coalition is recommending some aspects of its reform measures to the Department of Education, while other facets of the package will require legislation to set them in motion.
Test Run of Direct Lending
The Department of Education is engaged in a five-year test run of a direct-lending program in an effort to discover whether a government program can cater to the needs of students more efficiently than private lenders.
Under the Federal Direct Student Loan Program, the federal government borrows money to loan to students and services and collects the loans with federal contractors, largely cutting private lenders out of the picture.
"The Department of Education has done a good job so far," said coalition chairman Daniel S. Cheever. "The real test will be years from now when students are having problems paying back their loans. Will the government be as good at default management as private lenders?"
Annual Increases Planned
The number of loans made under the federal test program will increase annually up to a cap of 60 percent of all loans made to students.
Congress will examine the success of direct government loans in 1998 and decide whether to make it a permanent program.
Mr. Cheever sees definite advantages in the current privately run student loan program.
"Schools have a choice under FFELP, depending on who gives you the best service," he said. "With direct government loans, there's one choice: take it or leave it."
"I'm dubious that they can pull it off and make it work well," said Consumer Bankers Association president Joe Belew. "We'll have to wait and see."
Challenges Seen Remaining
Although the coalition's reform package is "pointed in the same direction" as banking interests, it fails to address some of the biggest challenges facing the FFELP, Mr. Belew said.
"Schools are looking for a reduction in the number of participants in the program, lower borrowing rates for current borrowers, and radical simplification in the exchange of data in the program," he said. "The Coalition for Student Loan Reduction proposals do not fully address these issues."
The FFELP is the largest source of student financial aid. It will provide approximately $19 billion of an estimated total of $20 billion in student loans next year.