Could the next evolutionary replacement of the Federal Family Education Loan Program (FFELP) be the catalyst that helps jumpstart the recovery of the U.S. economy?
What if I told you that one single product could possibly create and/or save tens of thousands of job, motivate banks to start lending again, and create a robust revenue stream for the government and banks at the same time. In addition, this product may start to thaw the frozen securitization and capital markets by stimulating private investors to start investing in student loans again, as well as inspire banks and the government to work together once more in a way that not only allows them both to save face, but raise their arms together as champions.
This product could allow Republicans and Democrats to stop fighting, actually agree on something, and both hail a common idea while addressing a major problem for the middle class. This product would be an investment in our Nation’s present and future at the same time. Its structure could also be used as the model, with slight alterations, in several other areas as well. Moreover, this product could potentially act as the catalyst that starts the recovery process from our nation’s economic downturn and because of what the product Is, it is a guarantee that our economy will continue to grow for generations to come.
What product can do so much and yet be so simple?
FFELP 2.0 or, the “Patriot” Student Loan Program
This product would be a true hybrid between a federal student loan and a private student loan. It would be designed to fund the ever widening gap between grants and the normal Direct Lending Federal Student Loan program limits and what colleges and universities actually cost per year. This gap equates to over $100 billion per year and continues to widen with no end in sight.
The program, in theory, would see loans originated by banks or servicing partners using a rigid set of lending standards with specific qualifications as a minimum standard (no credit score below X, multiple co-borrowers, etc.) to ensure all originated loans meet a consistent, quantifiable minimum standard. This ensures investors that at a bare minimum, the aforementioned loans meet a consistent level of acceptable risk. By doing so, it would create a transparent minimum standard that is extremely appealing to private investors from a securitization and capital market standpoint.
In this concept, the loans would be guaranteed for a six year period once repayment starts (the most volatile default period) by the U.S. Department of Education (ED) instead of for the life of the loan as was the case with FFELP 1.0. However, the guarantee only applies to a set specific interest rate for each program year. Conversely, in this concept banks would be allowed to charge higher interest rates on said loans, but do so without the guarantee on the additional amount(s).
ED would receive a guarantee fee paid at the time of origination that would be rolled into the loan and paid back by the borrower. This guarantee fee would then be put into a segregated reserve for the life of the six year guarantee. At the expiration of the six year guarantee, any funds remaining in the segregated reserve would be the property of ED.
This model is extremely appealing to private investors in securitizations as it provides a guarantee during the most tumultuous time of repayment for the program and also allows for higher returns with the ability to charge additional interest that was not available in the old FFELP program. Moreover, banks may be more willing to hold these loans on their balance sheet with the ability to make revenue along with the sharing of the risk with the government.
Non-government entities that originate, service, and perform collection activities could create (and/or save) tens of thousands of new “skilled” jobs nationwide. The beautiful thing is that the infrastructure already exists.
This product will also see banks, the government, and both Democrats and Republicans put aside their differences and finally start working together on a common project that directly takes steps to improve our economy today and for future generations to come. Moreover, the middle class would benefit tremendously from this product as the majority of the middle class are only first generation college graduates themselves and are struggling to fund the quality education that they know their children so desperately need to compete in a global economy.
Currently the only viable vehicle to bridge the direct loan to total education cost gap is a high-interest private student loan. This new product would dramatically reduce the long term cost (fees and interest) associated with the funding of the ever widening gap.
Lastly, the structure of this product could be used as a model for other financial obligations, such as mortgages to help jumpstart the housing market or business lines of credit for qualifying companies that could prove the funds are being used for organizational growth and ultimately to create jobs. But it all starts with the Patriot Loan Program and the reinvestment in America’s greatest asset: our children’s higher education and our ability as a nation to compete in a global economy. This is an investment in the foundation of America as well as the present and future of our great nation.
In the end, who am I? I am just one person with an idea that is trying to help. Yes this may have some flaws and there are other details that would need to be worked out. But it’s a start, and if this idea generates discussions or some brainstorming sessions, that is even better. If enough people speak up and start to share new innovative ideas for improving our current economic situation, we would find this country in a much better place than where it currently sits.
Walter Steele is the Chief Operating Officer of F.H. Cann & Associates (FHC). He is a Six Sigma Black Belt with over 25 years collection experience centered on receivables management and portfolio optimization. Throughout his highly successful career Walter has held key leadership positions with companies such as the publicly traded First Marblehead Corporation (FMD), JP Morgan Chase (JPM), and BankOne.