Today, the Federal student loan programs provide billions of
dollars to private lenders and other agencies -- billions of
taxpayer dollars that do not go toward serving students.
Furthermore, complex procedures and inflexible repayment plans
create serious problems for some students. Burdened with debt
and locked into insensitive repayment plans, many students cannot
repay their loans, leaving taxpayers to foot the bill. The
current system doesn't serve students or taxpayers well.
This legislation reforms the student loan system with a
less costly and less complicated alternative. The
Administration's Student Aid Reform Act will provide all
borrowers with flexible repayment options, including EXCEL
Accounts, which allow borrowers to repay loans as a percentage of
their incomes. It also reforms the student loan system by
replacing the current guaranteed student loan system with a
system of direct Federal lending. These changes will:
Make repayment easier by allowing borrowers to select the
best way to repay their loans. Borrowers will be able to
choose among several different repayment options, including
fixed, graduated, extended, and income-contingent EXCEL
Accounts. Providing a range of flexible repayment plans
will allow students to enter lower-paying community service
jobs without worrying about their debt burden and will
reduce default rates.
Reduce costs for taxpayers by substituting Federal borrowing
for more expensive private capital and eliminating excess
profits in the current system. By using low-interest rate
Treasury borrowing and by eliminating excess profits, direct
lending will reduce Federal costs by $4.3 billion through
fiscal year 1998.
Reduce costs for students by lowering interest rates. Part
of the substantial savings achieved from lowering the cost
of capital and eliminating profits will be used to reduce
the interest rate for student borrowers, when the plan is
EXCEL ACCOUNTS: EASING REPAYMENT AND ENCOURAGING SERVICE
The EXCEL Account will, for the first time, allow all
borrowers to pay off their loans as a percentage of their
incomes. This income contingent repayment plan, together with
other flexible repayment options, will give borrowers the
opportunity to choose lower-paying service jobs regardless of the
level of debt
incurred while in school. This new plan will also help to reduce
student loan defaults.
Borrowers will have the opportunity to choose from a range
of flexible repayment options to best fit their financial
situation. In addition, borrowers will be able to switch
repayment plans as their financial situations change.
EXCEL Accounts will provide for repayments that depend upon
income. Borrowers will be able to repay over a longer period of
time than in the other repayment options. The length of
repayment will depend on the borrower's level of debt and income.
The legislation requires the Secretary of Education to
publish regulations on the specific provisions of this
income-contingent plan, including the percentage of income
to be repaid each year and the length of repayment.
To increase accountability, the Secretary will also have the
authority to require defaulters to repay through income
The legislation will extend EXCEL Accounts to borrowers with
existing loans. It authorizes the Department of Education
to offer income contingent repayments to current borrowers
if lenders do not offer them acceptable income sensitive
Fixed, graduated, and extended repayment plans will also be
available to all borrowers.
Standard repayment describes a fixed-payment, fixed-term
(usually 10 years) plan that is currently used by most
student loan borrowers.
Extended repayment describes a plan with a lower fixed
payment and a longer fixed term than available under a
standard repayment plan.
Graduated repayment plans expect borrowers to repay smaller
amounts in the beginning when their incomes tend to be lower
and larger amounts later when their incomes tend to be
To make repayment easier and more effective, the bill contains
provisions to include the Internal Revenue Service (IRS) in the
collection of student loans.
Starting in fiscal year 1994, the legislation gives the
Secretary the authority to offer income contingent
repayments to borrowers using information from the IRS on
borrowers' incomes. The legislation will amend the current
disclosure provisions to allow IRS to provide this
information to the Department of Education.
As a second step, the bill requires the Secretaries of
Education and Treasury to jointly develop a plan to provide
repayment options through the IRS and wage withholding.
ONE-STOP DIRECT STUDENT LOANS
The legislation calls for the Federal government to make
loans directly to students, substituting Federal borrowing for
private capital. These changes will streamline the system,
reduce interest rates for students, and save taxpayers billions
The proposal will replace the Federal Family Education Loan
(FFEL) programs with the Federal Direct Student Loan (FDSL)
programs. Most students will receive all of their financial aid
through their existing financial aid offices -- "one stop
Direct lending substitutes Federal capital for more
expensive private capital and eliminates excess profits to
lenders, saving $4.3 billion through fiscal year 1998. Under the
plan, direct lending will phase in over four years, beginning in
academic year 1994-1995. Federal capital will be used for all
new student loans. The goal is to begin with 4 percent of new
loan volume in direct lending in the first year, 25 percent the
second year, 60 percent the third year, and full implementation
in academic year 1997-1998.
Private lenders will no longer make, or "originate", student
loans. Many postsecondary institutions will make loans
themselves; others will use the services of alternative
originators. No institution will be required, however, to
originate loans itself. In addition, no school will "service" or
Some features of the legislation regarding origination and
Criteria measuring the financial and administrative
capability of institutions to originate loans will be used
to determine which institutions may originate loans and
which should use alternative originators.
Institutions that meet the financial and administrative
criteria, but do not wish to originate loans, will also be
able to use alternative originators.
The Department of Education will pay a small fee to schools
that originate loans themselves and will contract out on a
competitive, fee-for-service basis to alternative
originators. Alternative originators may be State agencies,
private lenders, Sallie Mae, and other organizations.
Responsibility for servicing loans while students are in
school and while they are in repayment will not rest with
the postsecondary institutions. The Department of
Education will contract with a number of organizations to
service student loans. These organizations, which could
include State agencies, Sallie Mae, and private firms, will
be chosen through a competitive process.
ENSURING A SMOOTH TRANSITION
The Department of Education will be responsible for
monitoring and overseeing the student loan system as part of its
overall oversight of the Federal student aid system. The
Department is developing a detailed plan to ensure adequate loan
capital in the event that private capital dries up. The
legislation will provide the Department with additional
authorities to move quickly if capital shortages occur.
Postsecondary institutions, alternative originators,
servicers, and the Department of Education will share data
on student loans throughout the nation. The Department will
also complete work on the National Student Loan Data System.
Such a system has been under development since 1989 and must
be expanded to perform all the functions needed for direct
During the phase-in period, the terms and conditions for the
FDSL, including loan limits, eligibility rules for loan
subsidies, and number of loan programs, would be similar to
the existing FFEL programs, including the provisions for
loan deferment and forbearance.
The legislation also provides for two changes to the
nation's guarantee agency services, which provide in every
state an intermediary for the Federal government and
reinsure all loans in the current FFEL programs. The
legislation ensures adequate financing for the current
guarantee agencies during the transition and provides for
alternative mechanisms to assure loan guarantees in the
event that any of the guarantee agencies do not continue to