32 Student-Loan Groups Come Together to Propose Alternative to Obama’s Plan

Washington — Dozens of student-loan entities today proposed an alternative to President Obama’s plan to overhaul the federal student-loan system and move to 100-percent direct lending. The groups include banks, nonprofit state agencies, state-based guarantee agencies, and Sallie Mae, the nation’s largest provider of student loans, among others.

The groups’ consensus proposal would preserve a significant role for private and nonprofit lenders and guarantors in the federal system. It is being released as the U.S. House of Representatives education committee prepares to consider the president’s student-loan plan, action that could be scheduled as soon as this week. In recent weeks a number of lenders and guarantors have been furiously circulating various counterproposals to the president’s idea.

The 32 groups that signed on to the plan released today said that it should save the federal government as much money as the president’s proposal would. Their plan would eliminate the subsidies the federal government now pays to lenders in the bank-based guaranteed-loan program for all new loans issued and would give the federal government ownership of those loans.

Instead, it would create a fee-for-service system to pay providers for originating, servicing, and collecting on student loans. The plan would allow colleges to pick the providers they want to originate and service federal loans for their students.

The groups advocating the plan argue that their idea would lead to drops in defaults through “risk-sharing” incentives on loan servicing, would retain a competitive market that they say drives improvement in the delivery of student loans, would avoid risks they say would come with switching all campuses and students to direct lending, and would preserve 35,000 jobs that are supported by the current system.

“The time has come for a significant change in the way student loans are financed,” the groups wrote in a letter they sent to members of Congress. “We want to bring our expertise to the table and work constructively with you on this crucial policy discussion, and we believe this proposal is a positive step forward.” —Sara Hebel