The alternative proposal includes an innovative arrangement that requires the loan originator/servicer to share in the risk of loan default. The mortgage crisis showed firsthand how the lack of economic exposure in a mortgage loan led to poor credit decisions, overborrowing and catastrophic levels of defaults. Have we really learned so little that we would set ourselves up to repeat this error in the student loan program?
Sallie Mae knows how to help customers through economic bumps in the road. When we make contact with customers, we successfully keep them out of default more than 90 percent of the time. The risk-sharing concept we advocate would produce lower defaults by encouraging servicers to exceed the Education Departments prescribed collection steps and counsel customers how to better manage their loans. This extra effort would save tens of thousands of borrowers from the devastating and lasting consequences of default and billions of taxpayer dollars. With the Department of Education forecast that more than $1.5 trillion in new student loans will be made in the next 10 years, a lower default rate from strong competition and risk-sharing would save tens of billions of taxpayer dollars.
To date, the Senate has held no hearings about how best to make this dramatic change to student loan programs. Senate Health, Education, Labor and Pensions Chairman Tom Harkin (D-Iowa) continues to state that his committee will propose legislation that mirrors the legislation the House has passed, despite vocal concerns about the resulting job loss from moderate Democratic Senators. A reform of this magnitude deserves a comprehensive review. Sallie Maes efforts in Congress are simply to ask that job saving, disruption preventing, choice and competition preserving alternatives be given a fair hearing. The benefits of the enhancements outlined above are real, as is our strong desire not to put 2,300 Sallie Mae jobs needlessly at risk.
The president recently expressed a desire to explore bipartisan solutions. To pass his student loan proposal, the Senate would have to rely on the hyperpartisan budget reconciliation procedure. Yet the alternative proposal achieves nearly all of the desired savings (even before the $10 billion in additional savings from lower defaults) and could be passed with broad, bipartisan support. With a fair hearing, a better student loan program could be created for students, their families, schools and taxpayers. This is something we should all be able to get behind.
Jack Remondi is vice chairman and chief financial officer of Sallie Mae.