As many Harvard student know, under the presentfederally guaranteed loan plan, repayments ofloans generally occur over 10 years at a fixedrate.

That option will still be present under thedirect loan program, but there will be addedpayment plans available.

Students will now be able to extend the paymentperiod and use either a fixed or variable rate,Hicks says. They will also have the option of agraduated repayment schedule with the rateincreasing a few times as the students getfurther out of school.

These options, though not now universallyaccessible, are available from some lenders,according to Hicks.

The fourth option that will become available tostudents next year is an income contingentschedule, similar to one previously used in Canadaand Australia and now employed in Scandinaviancountries.

This "innovative plan" would allow students topay back a percentage of their income for varyingperiods of up to 25 years, Hicks says.

Under the current Federal Family Education LoanProgram, banks provide the money for loans and thegovernment pays the interest until the studentleaves school.

This makes the government the guarantor of theloans, so it becomes responsible for any defaults.

Hicks gives this example of the progression ofa loan under the present system. "Right now astudent goes to a bank like BayBank for a loan,"she says. "If they pay it off on time things don'tget too complicated."

But if the student in question defaults on theloan and the bank can show that it has "exerciseddue diligence" in collecting what it is owned, itcan bring in a collection agency and thus getcompensated even if the money is not actuallycollected, Hicks says.

"Then the guarantor tries to collect, and evenif they cannot they get fully reimbursed by thefederal government," she says. "The governmentthen hires the same collection agencies and thistime the companies receive 30 percent of anycollection they make."

This system causes a "warped incentivestructure" because the participants do not have areason to perform, Hicks says. She stresses,however, that this structure is not the result ofintentional negligence.

Hicks adds that the current system has recentlybeen changed with the latest wave of educationalreform. So the reimbursement process for loanswill have somewhat better incentives, even underthe old loans system, in the future.

Details of the Process

Part of the reason that Harvard was selectedwas the prominent role of Sen. Edward M. Kennedy'54-'56 in creating the program, Hicks says.Kennedy, as chair of the Committee on Labor andHuman Resources, was responsible for formulatingthe legislation before it was presented to theU.S. Senate.