In addition, this budget proposal does not account for the wide range of student loan financing costs among individual lenders. The administration contends this change is needed to eliminate a competitive advantage enjoyed by lenders that have access to tax-exempt financing. The net effect of the proposal, however, would be to penalize nonprofit lenders, many of which pass on to borrowers their lower costs of raising student loan capital. Cuts in Guarantor Retention of Default Collections . Student loan guarantors would be allowed to retain only 18.5 percent of the funds they collect from defaulted borrowers, rather than the current rate of 24 percent, according to the budget submitted today.
Guarantors use their share of default collections to cover their collection costs.
The remaining share of funds collected from defaulted borrowers is returned to the federal government. In addition, the proposed budget would cut to 12 percent, from the current rate of 18.5 percent, the guarantor share of collections due to consolidation of defaulted loans. Guarantor retention of default collections was cut from 27 percent to the present level of 24 percent in the 1998 reauthorization of the Higher Education Act. As part of the reauthorization act, a guarantor's share of default collections is scheduled to decline again to 23 percent in fiscal 2003. Recall of Guarantor Reserves .