Helping students manage education debt: whose job is it?

THE RECENT ACTIONS OF Congress to reform the student loan program have shone a spotlight on the issue of student debt. Education debt, or more aptly, the ability to handle that debt, is impacting the choices student loan borrowers make about college, career, and starting a family. Most importantly to those in higher education management, student loan debt is impacting your institutions long after your students leave campus.

According to a recent study of more than 300 graduates commissioned by American Student Assistance, a Federal Family Education Loan guarantor, education debt has a direct correlation to alumni giving: Alumni who had no loans were twice as likely to donate to their alma mater as those with loans, and those with loan balances below $20,000 were much more likely to give than those with higher debt. Furthermore, the study showed that college graduates don't feel adequately prepared to handle their finances; they overwhelmingly agreed that there should be more financial counseling for student borrowers, and more than 60 percent said they only had a vague understanding of the debt they were accruing.

Additionally, the study found not only that borrowers believed they should receive financial counseling but also that the more satisfied they were with the debt management information from their financial aid office, the more likely they were to contribute funds after graduation. And alumni can also influence your institution's next generation of students; there's no substitute for building your institution's brand and reputation than word of mouth from satisfied alumni.

For some elite higher education institutions with healthy endowments, the solution to the education debt issue is to eliminate student loans completely from all financial aid packages, or for those students and families with incomes below a certain threshold. But for the majority of our nation's colleges and universities, this is simply not an option financially. Instead, the answer for these institutions lies in increasing alumni's ability to successfully manage their debt.

But this solution comes with its own questions, namely, just who is responsible for helping students cope with student loan repayment after they've left school? Students often feel that their institution should provide debt management training. In some cases, so do the schools. An ASA survey of more than 350 financial aid professionals found that the majority felt it was their job to help students prevent repayment problems. But less than 30 percent of survey respondents said they had the time to work on default prevention for students once they had left school.

From a public policy perspective, training on education debt management could be viewed as a federal obligation. After all, the current federal student aid system hinges on loans. Loans make up 51 percent of federal aid today, versus grants, scholarships, and work-study. If we as a society accept that student debt is not going away any time soon, a strong argument can be made that it's the government's responsibility to provide students and families with the information and assistance they need to manage student loan repayment. However, it is unrealistic to expect the federal government to have the resources to support and facilitate such an endeavor nationwide.

Whose job is it to support student loan borrowers throughout the life of repayment? Federal student loan guarantors represent the best solution. As nonprofit, federally funded organizations with a public purpose mission, guarantors are uniquely suited to help students and families manage college debt. Since the Higher Education Act of 1965, guarantors have administered the federal guarantee for lenders against the financial risks of lending to an 18-year-old with no credit. In this capacity, guarantors have mainly acted as loan processors and collection agents on behalf of the federal government, and in fact the bulk of their revenue has come from collections.

Fortunately, through the hard work of guarantors, lenders, schools, and the government, the national student loan default rate has dropped significantly since its high point in the 1980s. Guarantors can now serve student loan borrowers and taxpayers best by being stewards of the public trust in a different way: not as collectors of federal dollars after default occurs but as efficient managers of the government's education loan portfolio working toward preventing repayment problems before they occur.

Why change the role of the guarantor?

* It is a win-win for all. Giving guarantors a greater responsibility in default prevention is a much better use of taxpayer dollars, with better outcomes all around: better credit and overall financial wellness for borrowers; lower cohort default rates and more financially stable alumni for schools; government savings on default costs; and a well-educated, more fiscally secure workforce.

* Guarantors are proven to affect borrower repayment behavior. Guarantor outreach, communication, and support throughout the life of repayment can influence borrower payment habits. An ASA pilot program showed that recent graduates, when provided with regular communication about repayment, career, and debt management for the first two years of repayment, were 50 percent less likely to default on their student loans than borrowers who received no communication.

* Guarantors can facilitate a federal obligation locally. Guarantors are also in the best position to assist the federal government in its debt management obligation to student loan borrowers on a local level. As the administrators of the Federal Family Education Loan Program at the state level for the last 40 years, the majority of guarantors have already built up a network of local contacts and partner organizations to carry out community outreach initiatives on college access and financing. As education debt managers, guarantors could play a leading role in bringing financial literacy initiatives to the community, coordinating the efforts of state governments, nonprofits, and area employers.

Voluntary Flexible Agreements between guarantors and the U.S. Department of Education are changing the way we think about student borrowing. Permitted by the Higher Education Amendments of 1998, VFAs test new and innovative methods for carrying out the types of activities currently required of guaranty agencies to identify and demonstrate more efficient and effective means to manage federal student loans. The VFA objective is experimentation in order to find best practices, collect long-term data, and share results that capture what best benefits students, schools, the federal government, and the American taxpayer.

ASA's VFA, one of the first to be implemented in 2001, centers on a performancebased fee structure focused on loans in good standing, such that we do not receive federal payment for loans once they become delinquent. The shifting of revenue incentives from back-end default collections to a front-end emphasis on delinquency and default prevention, through more effective portfolio management, has allowed ASA to realign financial resources with our mission of education debt management. As a result, we estimate taxpayer savings of $40 million over the last five years as a result of fewer defaults and more defaulted loans returned to good standing.

By aligning the guarantor's role with the needs of present-day society, we can ensure we're not sending students into a world of debt ill-prepared and unsupported.

By Paul Combe, president and CEO, American Student Assistance