National Association of Student Financial Aid Administrators Releases Discussion Paper on Student Loan Auctions

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The National Association of Student Financial Aid Administrators (NASFAA) released a discussion paper, Evaluating Student Loan Auctions, which raises questions and concerns about the efficacy of using an auction system to determine subsidy rates for student loans. The paper argues that many of the assumptions used in creating the auction system may be misguided.

The National Association of Student Financial Aid Administrators (NASFAA) released a discussion paper, Evaluating Student Loan Auctions, which raises questions and concerns about the efficacy of using an auction system to determine subsidy rates for student loans.

The College Cost Reduction and Access Act (P.L. 110-84), signed into law on Sept. 27, 2007, implements a new student loan auction system for certain loans that will begin on July 1, 2009. After this date, parent PLUS loans will be auctioned to the student loan provider that offers to take the lowest subsidy rate from the federal government for the right to be a state's exclusive loan originator. The lenders with the two lowest bids will have exclusive rights to originate parent PLUS loans in the respective state for two years. While only applicable to parent PLUS loans, some lawmakers would like to expand the system to all student loans in the Federal Family Education Loan (FFEL) program.

"While the current system used to determine the subsidy rate for student loan providers is far from perfect, the auction system created by the new student aid law is fraught with potential problems," said Justin Draeger, NASFAA's assistant director for communications. "The purpose of the auction system is to increase competition and reduce taxpayer costs. In reality, the system could actually reduce competition and increase taxpayer costs."

The paper argues that many of the assumptions used in creating the auction system may be misguided, noting that:

  • Student loan provider subsidy rates may initially decrease in a handful of states where loan volume is high enough to truly warrant competition, but most states will see little competition between loan providers.
  • Taxpayer savings have been overstated and that in some cases taxpayers will pay more through the auction system than loans originated outside the auction.
  • Student loan borrowers, namely the "working poor," stand to be the biggest losers through an auction system as loan providers compete for the right to originate loans, but have no motivation to increase borrower benefits like reduced origination fees or lower interest rates.

"This discussion paper raises several questions that require further investigation before an auction system is implemented," said NASFAA President Dallas Martin. "I applaud lawmakers for looking at market-based solutions that could yield additional savings to taxpayers, but we must be certain that these programs will accomplish what they set out to do and not inadvertently harm students."

A copy of Evaluating Student Loan Auctions is available online at http://www.NASFAA.org/PDFs/2007/DPAuctions.pdf.

The National Association of Student Financial Aid Administrators (NASFAA) is a nonprofit membership organization that represents more than 12,000 financial aid professionals at nearly 3,000 colleges, universities, and career schools across the country. Based in Washington, D.C., NASFAA is the only national association with a primary focus on student aid legislation, regulatory analysis, and training for financial aid administrators. Each year, members help more than 8 million students receive funding for postsecondary education. In addition to its member Web site at http://www.NASFAA.org, the Association offers a Web site with financial aid information for parents and students at http://www.StudentAid.org.

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Justin Draeger
NASFAA
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