NASFAA Report: Student-Loan Auctions ‘Riddled With Problems’

The National Association of Student Financial Aid Administrators produced the paper “Evaluating Student Loan Auctions” to spur discussion about a proposed auction of rights to originate parent PLUS loans beginning July 2009.

The recently enacted College Cost Reduction and Access Act calls for an auction system that would award to the two lenders submitting the lowest special-allowance bids in each state exclusive loan-origination rights until the next auction in two years.

The NASFAA paper concludes that a student-loan-auction system will “likely result in market consolidations, fewer loan providers, fewer benefits for borrowers, and limited savings for taxpayers that will diminish over time.”

The paper concedes the lender-subsidy rates may decline initially under an auction system, but that larger lenders are likely to drive smaller lenders out of the program, ultimately resulting in less competition and potential increases in lender-subsidy rates in the future. The NASFAA paper also notes that, while an auction may produce some savings to taxpayers, it likely will increase loan costs to borrowers. Competing lenders will have no incentive to offer borrower benefits that today reduce borrower fees and interest rates.

The paper suggests that a more-realistic alternative would be to work with loan providers, stakeholders, and other nonpartisan analysts to adjust lender-subsidy levels on a more frequent and independent basis than has been done in the past.

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