Tag Archives: Income Based Repayment



Student loans were designed to put many students who wouldn’t have ordinarily been able to afford higher education, into colleges and universities. The U.S. government actually believed that education was the primary responsibility of the parents. But they also recognized that many parents just couldn’t afford to send their children to college, no matter how much they wanted to.[1]


Today in the student loan program, thousands of corporate and government entities enjoy, by law, a contractual right of payment from the U.S. government—all part of the effort to lubricate the system with enough cash so that students ultimately get the loans they need. The current entitlements include the following:

  • Thirty-six federally-backed “guarantee agencies” are entitled to a .4% “loan processing and issuance fee,” paid by the federal government. These agencies are also entitled to a .1% “account” maintenance fee,” paid by the federal government, and they have the legal authority to charge students a 1% “guarantee fee.”
  • Thousands of banks and secondary markets (which purchase loans from banks) are entitled to quarterly returns equal to the rates on commercial paper plus 2.34 percentage points during repayment and plus 1.74 percentage points during the in-school and grade period, assured by the federal government.
  • If a borrower’s payments are late, the guarantee agency has an opportunity to encourage the borrower to make a payment. If successful, the agency is entitled to a 1% “default aversion fee.”
  • If the borrower defaults, the lender or secondary market is entitled to receive a minimum payment of 98% of the principal and interest.
  • If a loan defaults, the guarantee agency is entitled to keep 28% of any amounts it is able to collect. All of these provisions—and more—are set and adjusted through the political process, without the benefit of competitive market forces or even a regulatory check.

This patchwork quilt system leads to a second problem: unanticipated loopholes, requiring legislative repairs that further complicate the system. Over the years, the troubles have included lenders that timed their requests for federal payments in order to hide high default rates, guarantee agencies that had conflicts-of interest with board members and affiliates, and schools that used multiple intermediaries in order to mask large increases in loan volume. All of these situations cost taxpayers. In one case, the collapse of a guarantee agency led to an expensive federal taxpayer bailout. The Government Accountability Office (known then as the General Accounting Office) has repeatedly labeled student aid as a creating a high risk of waste, fraud, abuse, and mismanagement. President Bush’s budget office describes the FFEL program as structurally flawed, with “unnecessary subsidies” and questionable cost effectiveness.[2]

[1] Financial Shopper Network The History of Student Loans


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