SAFRA One Year Later: It's Been a Year since the Student Aid and Fiscal Responsibility Act Took Effect. How Is It Working and What Is to Come?

By Robinson, Tom | University Business, June 2011 | Go to article overview

SAFRA One Year Later: It's Been a Year since the Student Aid and Fiscal Responsibility Act Took Effect. How Is It Working and What Is to Come?


Robinson, Tom, University Business


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THE STUDENT AID AND FISCAL RESPONSIBILITY Act (SAFRA), passed in May 2010 as part of the Healthcare Reform Act, was an attempt to rein in the student loan industry and save money by taking private lenders out of the equation. But a year later, educators, parents, and legislators are asking, is the program delivering on its goals?

SAFRA was the result of a contentious decades-long battle to end private loans and dismantle the Federal Family Education Loan (FFEL) program in favor of the Direct Lending (DL) program managed by the Federal Student Aid (FSA) office of the U.S. Department of Education. Proponents of Direct Lending--perennial advocate Bob Shireman, a former Department deputy, for one--have been pushing the concept for decades. The tipping point that brought that to fruition actually came two years earlier.

Anticipating the FFEL-to-DL program and wary of the worsening credit crunch, Congress passed the Ensuring Continued Access to Student Loans Act (ECASLA) in October 2008. It authorized Arne Duncan, the U.S. Secretary of Education, temporary authority for the Education Department to purchase FFEL loans--effectively providing a secondary market for these loans. The FFEL program constituted 78 percent of the total dollar amount of federal student loans originated between 2005 and 2008. By 2009, the FFEL pro gram's share had fallen to 69 percent, and to a mere 18 percent in 2010 as difficulties experienced by private lenders during the financial crisis and uncertain prospects for the guaranteed loan program led many schools to switch to the direct loan program. The student loan volume is estimated to be $1.4 trillion over the 2010-2020 period. Although the Education Department probably could have financed all the loans required by students in FY2010, some felt that such a rapid scale-up might cause problems, so the mandate to switch was set for July 1, 2010 (FY2011).

Customer Service Efforts

One of the most obvious changes is the servicing component. The DL program had been serviced by ACS, a division of Xerox. With the increase in loan volume now flowing through FSA, new servicers were needed. In June 2009, four contactors were selected to service the $550 billion portfolio and assume servicing responsibilities for all newly originated DL loans: AES/PHEAA; Great Lakes Education Loan Services; Nelnet Servicing, LLC; and Sallie Mae.

Since staff at so many other loan services would be losing jobs, Congress authorized $25 million for 2009 and 2010 to help retrain and redeploy workers most affected by the recession. Only $19 million was applied for in 2010. The lenders, originators, and guarantors that worked under FFEL also lost a lot of business. Many quit or were forced to fold. The four servicers working under DL have now retooled. Sallie Mae is the only one still originating private loans. Nelnet, Great Lakes, and PHEAA are adding other business services geared for the higher education marketplace. All are actively improving their own offerings to borrowers and school customers, motivated by an incentive program.

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The chosen service contractors went through an arduous procurement process. Initially, applicants had to be prequalified by having already serviced a significant volume of student loan assets, thus narrowing the field considerably. Only then did the formal bid process, requiring a lengthy and detailed Request for Proposal, begin. Finalists selected were just beginning what would be a six- to nine-month period of further review and onsite visits. One of the primary goals of this stringent due diligence was to determine if the would-be servicers could meet the onerous Federal Information Security Management Act (FISMA) cyber security standards.

The servicing firms would be awarded loans based on five performance metrics. Three metrics measure the satisfaction among separate customer groups, including borrowers, financial aid personnel, and student aid and other federal agency personnel who work with the servicers. …

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