College Guide


April 07, 2011 12:15 PM A Greater Structural Problem: How the Student Loan Industry Works

By Daniel Luzer


A few weeks ago the Institute for Higher Education Policy issued a report indicating that student loan delinquency was becoming a huge problem for former college students; only 37 percent of borrowers were able to fully pay them back on time. In light of this information the Monthly recently spoke about student loans with Paul Combe (right), the President and CEO of American Student Assistance, one of America’s largest student loan guarantors.

Washington Monthly: Most people don’t actually know what your organization is, unless they have student loans and they have a specific relationship with your organization. Explain what ASA is and what it does.

Paul Combe: ASA is a loan guarantor. It’s a non-profit organization whose focus is helping education loan borrowers manage their debt. It’s as simple as that

WM: Tell me briefly what a guarantor is.

PC: Their traditional role, going back to the 70s, was to encourage local banks to participate in the then new federal Guaranteed Student Loan programs. Guarantors provided financial aid information to students within their states to help them access and finance a higher education. They acted on behalf of the Department of Education making sure that schools and lenders stuck to the federal rules and regulations pertinent to the loan program.

One of the key functions they have is to insure the lender against default. Guarantors manage a process called pre-claims; when a loan becomes more than 60 days past due, the lender notifies the guarantor that they may have a default claim coming up. The guarantor’s job is to try to get the borrower back in good standing. If the loan defaults, the guarantor pays the lender the claim for the loan, which pays the lender off in the process. And on behalf of the federal government the guarantor holds that loan, and collects on it.

WM: Is there any equivalent in regular loans, in normal consumer debt?

PC: No, not really. So if you have a consumer loan that is 60 or 90 days past due, it starts to be written off by the lender and is sold off for some cents on the dollar, to agencies who handle bad debts. The federal loan program is like taxes, the loan never goes away. If you look at this from the lenders point of view the consumers have very few protections. So it’s a very different loan. Federal student loans are exempt from normal consumer , truth in lending protections. There is no analogous functionality within the lending industry for a guarantor or the functions they perform.

WM: When did we start to have institutions like yours?

PC: ASA was created in 1956 when the state of Massachusetts decided that people needed help financing higher education. State legislation created institutions like ASA, and the individual banks in the state created a guarantee pool. So basically it was an insurance pool. That allowed the banks to lend to 17-year-old kids.

WM: Because in normal loans you can’t loan to people who don’t have assets or income.

PC: Exactly. The point of it was to provide this guaranteed pool for lenders to encourage lenders to lend to people for college. The first federal loan program was the National Defense Student Loan, created in 1958. And that was created as a revolving pool, managed by the schools. So the idea was the federal government could seed money in, the school would lend it to the students, the students would pay back the loan at interest, the interest would go into a pool, they’d have more money to lend to future students. That process couldn’t keep up with the growing need.

Later, with the passage of the Higher Education Act of 1964 the federal government developed the insurance model and for the guarantors to be involved in the program, and for us to actually manage that and bring private lenders into the program. Basically, the guarantor’s role was to make the program successful, which they did, very well.

WM: But before the 1950s, people still went to college. How did people go to college without these complicated loan programs?

PC: If you look back at the demographics of people who went to college it was primarily upper middle class population. The first financial aid program changed the American landscape, it was the GI Bill at the end of World War II. Everybody who was GI, regardless of social background, had the chance to go to college. And when those people who got that education had their own children, guess what? They wanted their kids to be able to go too.

WM: But by that time college was a lot more expensive and so we got financial aid as we now know it?

PC: Sort of. The GI Bill spurred a lot of research done in the 50s on financial aid. That’s when they came up with the current financial aid system, where need analysis was perfected. And need analysis in those days was a purely economic measure—there was no politics involved, a purely economic process controlled by the colleges to determine how much someone could afford to pay for higher education.

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer


  • The American educational system is garbage from the top down. on July 26, 2011 7:36 AM:

    Regular universities/colleges are just guilty of uninforming students as proprietary schools. Ask students from regular universities if they've been told about forebearance? For most the answer will be no. Proprietary schools are out to make money. Public schools are just saturated with people who don't care...and I'm tired of them. Financial aid personnel are supposed to KNOW what students, instead of just sitting around collecting a paycheck and telling students they don't know.