Utah's successful student-loan servicing programs, credited with driving the state's default rates to the nation's lowest, may continue operating under a historic financial-aid overhaul, U.S. Secretary of Education Arne Duncan said Tuesday. But Utah leaders remained skeptical that the new law is a good deal for students.
Earlier in the day, President Barack Obama signed legislation that eliminates banks from the federal loan program. Beginning July 1, the government will originate the loans, diverting a projected $68 billion in savings to financial aid and community colleges. The legislation builds on Obama's goal of making the United States the most educated nation by decade's end. A key aspect in his plan is boosting the budgets of the nation's community colleges, particularly those serving minorities, and bolstering the Pell Grant program, which serves 8.5 million needy students.
Cutting out banks as middlemen in the student loan program frees up billions to make the necessary investments in higher education without hitting taxpayers for a single dime, Duncan said during a conference call with reporters.
"These opportunities don't come around often," he said. "As the nation gets back on its feet, we will be educating our way to a better economy."
Utah education leaders opposed the overhaul because the state, through the non-profit Utah Higher Education Assistance Authority (UHEAA), is credited with doing an excellent job of both originating and servicing the loans. Banks have abandoned Utah's student loan market, so the state has taken up the slack.
Under Obama's overhaul, campus financial aid offices will process student loans that the federal government originates. Private contractors will service them, possibly putting UHEAA out of business and costing Utah students the high level of service they have enjoyed for several years, said UHEAA Executive Director David Feitz.
The state's two Republican senators, meanwhile, have excoriated the Obama administration for tacking the overhaul onto the massive health care reform bill passed last week by a bitterly divided Congress. The Senate was deprived of a chance to debate the pros and cons of nationalizing student lending.
Despite Duncan's promising words about UHEAA, Feitz remains troubled about the future of his agency, which services more than $2 billion in loans with a 183-person staff.
"This is the wrong approach for Utah. The jury is still out on whether the Department of Education can handle billions of dollars of student loans on a long-term basis," he said. "We hope to be an effective part of the solution by being a local servicer."
In recent years, UHEAA has kept student loan default rates low thanks to the interest rate breaks it gives for on-time payment and customized payment plans for struggling students. Utah's 2.1 percent default rates is less than one-third the national average. Even though the federal government has had a direct loan option in place since 1993, very few Utah students go that route, according to Feitz.
"The inference is you go where the best service is and the best service is locally provided," Feitz said. He vowed to fight to win a contract to service Utah loans.
During Tuesday's teleconference, Duncan emphasized the benefits students can expect under the new regime: higher Pell Grant awards, inching up to almost $6,000 at the maximum level; repayment limited to 10 percent of a student's income; forgiveness of debt after 10 years for those who enter public service; and an expansion of the higher education tax credit. He also assured that the new law provides flexibility to keep high-performing non-profits in the servicing game.
Asked if agencies like UHEAA will service loans, Duncan said "that's absolutely a possibility. I don't foresee any conflict there." Loan servicing will be handled entirely by the private sector, but who will get these contracts and how they will awarded remains murky.
Duncan added that Utah's share of enhanced Pell awards will be $250 million over 10 years, dwarfing the approximately $5 million the state provides in need-based aid.
If the federal money materializes, it will be a substantial increase in what Utah students have reaped in past years, which has ranged from $80 and $100 million in Pell aid over a decade.
The Utah Higher Education Assistance Authority originates and services most loans for students attending public colleges and universities. The non-profit's 183 employees could lose their jobs if the agency doesn't get a contract to continue servicing loans under legislation signed Tuesday by President Barack Obama.