Ensuring Student Loan Access
This post was written by Michael Bennett
April 21, 2008 1:10 pm College Access, Credit Crunch, LoansIn the wake of alarming news reports that fallout from the sub prime mortgage crisis might prevent students from accessing student loans, Congress, the Department of Education, and the higher education community have been working to ensure loan access is uninterrupted.
The Senate and House education committees have held hearings and the chairmen of these committees are working to pass legislation that would increase loan limits and allow the Department of Education to buy loans so cash-strapped lenders can raise money to make new loans. In addition, other senators and representatives have introduced separate legislation that would inject liquidity into the student loan market through various means.
Meanwhile, Education Secretary Margaret Spellings has been preparing for increased participation in the Direct Loan program and has engaged guaranty agencies to ensure that the lender of last resort (LLR) provisions will be ready. Spellings also met with Treasury Department Secretary Henry Paulson and the two have determined that the federal government has authority to provide the agencies with capital to make LLR loans, if needed. Finally, the Department is expected to announce a plan to provide liquidity for the student loan market through the Treasury’s Federal Financing Bank and the Federal Reserve.
While these actions by Congress and the Department are reassuring, we continue to see troubling signs in the field. Major lenders continue to suspend participation in various lending programs, loan rates are increasing while benefits are decreasing, and some schools are having a harder time finding lenders to complete requests for information and proposals.
NASFAA has worked hard to stay ahead of this evolving situation to ensure seamless access to student loans and has tried to walk a fine line – assuring the media and families of our expectation that student loans will be available, while encouraging the Department and Congress to prepare today for a worst-case scenario in the fall.
What you think of actions taken by Congress and the Department? Have these actions eased any anxiety you might have about your students’ ability to access loans this fall? How are your students and their families responding? I’m also curious about how you think NASFAA has handled the situation. Is there anything more you’d like to see NASFAA do? Is there anything you wish NASFAA wouldn’t do?
April 22nd, 2008 at 7:11 am
As one of my collegues has said, “Be careful what you wish for!”
I am most concerned that the lenders who have decided to no longer participate, have also decided not to continue to work with students who have used them as lenders in the past. Some students have had several loans with the same lender. The decision to no longer work with these borrowers is sending a very upsetting message. Now the fear of not being able to finance their continued education and reach their degree goals is very real and they are looking to us for an explaination and answer. The scramble is on to find a new lender and what about consolidation down the road with it’s impact on default.
The fall-out has been a disruption of a system that was working causing extreme anxioty among students and really, for what gain?
April 22nd, 2008 at 7:25 am
My personal opinion, which is not reflective of my employer:
Congress rarely creates “bulletproof” legislation without unintended consequences during normal business.
When they rush - vis a vis the PATRIOT Act - they’re pretty much guaranteed to create more problems than they solve.
A simpler solution would be to revisit or even eliminate the loan subsidy changes made in the ironically named College Cost Reduction and Access Act, which has neither reduced college costs nor improved access. Once a minimum level of profitability returned to student loans, their ability to attract investors - and therefore liquidity - would let market forces solve the problem, rather than legislative fiat, no matter how well intended.
Again, my opinion only, and in the spirit of transparency and full disclosure, I work for a FFEL lender.
April 22nd, 2008 at 8:56 am
Be careful what you wish for is very appropriate in this situation. In the rush to eliminate Stafford in favor of Direct Lending the result has left students and parents not knowing where to turn. NASFAA should work with all to help students and parents trust and turn to aid administrators as the folks who truly put the best interest of students and parents first. We have been through hard times before, and in the end, we will find a way to provide the best solution for our students.
April 22nd, 2008 at 9:20 am
Recently a noted official in higher education circles indicated that the cuts in subsidies due to the College Cost Reduction Act, had they NOT been passed, would only have delayed a tiny bit the credit crunch in the student loan markets. I wish I thought the current situation would be solved by something as simple as what Christopher suggests. It won’t be. But expecting Congress to solve it quickly is unrealistic too. I suppose schools will simply seek additional lenders to add to their recommended lenders lists to meet the new requirements as of 7/1.
I fear for the problems in access that students needing private loans will have in the coming year, too.
April 22nd, 2008 at 10:37 am
As much lenders would love to give student loan money away for free, they still have to pay the folks who run their systems and take student calls, just like schools and the federal government. Subsidy cuts are forcing them to make cuts in their programs. Congress and the current administration, who so often lack foresight, neglected to see the credit crunch coming when they enacted the CCRAA “plan to aid students,” although there were plenty of warnings from economists that this was coming. They also refused to listen to the alarms raised by the student lending financial community.
I agree with Christopher. There are plenty of lenders left in the program that do not obtain their student loan funding from the credit markets, whose programs are viable but struggling because of subsidy cuts. Those student loan programs could be salvaged by re-visiting CCRAA and increasing subsidies, even just a little. Sure schools could rush to Direct Lending, but can the federal government get all those schools who need lenders set up and operating efficiently in time for the upcoming academic year and can schools afford to change systems and train staff in time? It’s almost May.
The first wave of the access tsunami has indeed hit, but it’s only the first wave. There are bigger waves coming if Congress doesn’t act quickly. NASFAA could help deflect that wave by encouraging Congress to re-visit the CCRAA.
April 22nd, 2008 at 11:02 am
Two things happened at the same time - CCRA and the credit crunch. To say things would be different if one or the other did not happen does not makes sense. Both things did happen.
If either event did not occur - we would not see the dramatic pull back we are seeing from lenders. Of the two events - we have control over lender subsidies.
Creating new solutions that are unproven is risky. Waiting out the credit crisis will not solve anything. Relying on Direct Lending to pick up 100% of the consolidation volume and significantly increased origination volume is a disaster waiting to happen.
April 22nd, 2008 at 7:13 pm
Were the lenders not already sharing the profits with the borrowers (and schools)through repayment incentives, partnerships etc? I’m not sure I get why the subsidy needs to be increased to keep them all in the game… and do we need them all? Many simply jumped on the gravy train and now it’s over and where are these loyal lending partners? Gone to find something more lucrative… That’s what businesses do and to pretend they truly want to help educate the poor and aid the unfortunate is ludicrous. Didn’t one of the big ones just decide not to lend to those poor students at that poor school? How much more tangible proof does the community need to conclude it’s really, truly a business– capitalism at its best!
Why not take the energy spent on saving FFEL and spend it on making DL better? I guess it’s just easier to change the list on a homepage rather than make a real change in all this. Problem solved.
April 25th, 2008 at 10:38 am
The editorial below is from Thursday’s Wall Street Journal:
Bailout of the Year
April 24, 2008; Page A12
Guess who’s asking Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke for a bailout now? Hint: They are members of an exclusive club who bet wrong on the credit markets last fall. No, it’s not a cabal of Wall Streeters, but Democrats in Congress.
We’re referring to the “student loan crisis” now appearing in a media outlet near you. In September, Congress vowed to make education more affordable by passing the “College Cost Reduction and Access Act.” The law reduced the interest rates borrowers pay on federally insured student loans. Backed by the Federal Family Education Loan Program, these loans account for more than 70% of education lending. Taxpayers will fork over $7 billion by 2012 to pay for the rate cuts.
But Congress didn’t stop there. Convinced that the private lenders who make these loans were reaping too much profit, Congress also cut the yield on each loan. The return on the popular Stafford loan for undergrads was reduced by 70 basis points. For loan consolidations, Congress cut returns by 65 basis points. In a vibrant market, banks might have absorbed these hits and continued to lend. But the combination of legislative fiat and fewer investors willing to buy asset-backed securities amid the credit crunch has put the squeeze on lenders.
What’s now clear is that Congress didn’t merely wring the profits out of student lending. It’s blown up the entire student loan market. Market leader Sallie Mae says it now loses money on every new federal education loan. Sallie continues to lend in hopes of a change in D.C., or increased investor demand for securitized loans.
Others can’t wait. A third of the nation’s top 100 lenders to students in 2007 have temporarily suspended new loan originations or exited the business altogether. Citibank subsidiary Student Loan Corporation cited “unprecedented federal legislation” in announcing its recent withdrawal from much of the market.
Usually, the law of unintended consequences takes so long to reveal itself that no one remembers the culprits. But the speed at which Congress’s student lending changes have gone south is raising political danger for Democrats, if Republicans had the wit to point it out. (They don’t; that’s why they’re Republicans.)
Democrats would thus like to clean up the mess they created before May, when a flood of college-bound seniors will seek loans. But the pols can hardly repeal their autumn blunder mere moments after taking credit for it. No doubt many of them are still sending out taxpayer-financed mail bragging of their “achievement.”
The result is that the same man who authored last year’s bill to cut lenders’ returns has crafted a new bill to subsidize those same lenders. Last week the House passed Education and Labor Chairman George Miller’s latest foray into collegiate finance. The bill gives the Department of Education new authority to purchase loans directly from lenders.
To summarize: Congress mandated a return on student loans that is too low to attract private capital in the current market. So Congress will now use your money to create artificial investor demand. Taxpayers will bear more risk so that Congress can fashion a new business model to replace the one it just destroyed. The Bush Administration, unwisely but typically, has endorsed this approach.
Oh, there’s more. Mr. Miller’s allies in the Senate understand that legislation moves more slowly on their side of the Capitol. There may be too little time before the angry phone calls from parents target the 202 area code. So the same Senators who gave us the autumn accident have begun a letter-writing campaign to request that bailout we mentioned earlier.
Daniel Akaka, Bob Casey, Tom Carper, Chris Dodd, Tim Johnson, Bob Menendez and Jon Tester are desperately seeking a bureaucrat with a large checkbook to rescue them from their self-made political disaster. Last Thursday they wrote Mr. Bernanke asking him to accept student loans as collateral under the Fed’s new Term Securities Lending Facility. They sent a similar letter to Treasury Secretary Paulson asking him to order the Federal Financing Bank to buy student-loan-backed securities.
So having raised solemn alarms when the Fed began to accept dodgy mortgage-backed securities as collateral, the Senators are now demanding that the Fed accept dodgy student-loan paper too. The Senators helpfully note in their letter that a virtue of their proposals is that they can be implemented quickly. Indeed, November is just around the corner.
Needless to say, none of this legislative history is appearing in the multiple media sob stories about students who can’t get loans. But like airline passengers stranded this month due to panicky inspections, the current student loan “crisis” didn’t have to happen. It is entirely a product of Congress.
April 25th, 2008 at 11:02 am
By intonation of AMD’s comments, it appears he/she is convinced (as we all should be) that having the federal government maintain the entire student loan program is exactly what is needed and most efficient. We need a bigger/badder government run machine to solve our woes. Bring on more humungous, clumsy, ineficiently-run social programs! Heck, why not have the federal government take over post-secondary education all together and homogenize what we have a chance to learn, maybe even eliminate choice altogether.
It is amazing that we have collectively failed to recognize and address the underlying current of what is causing this debate over funding in the first place - the ever skyrocketing cost of obtaining an education at colleges that have priced this goal so far out of the reach of our citizenry as to also look as discriminatory as how AMD has chacterized lender practices.
Face it, colleges are businesses every bit as much as lenders are. “To pretend they truly want to help educate the poor and aid the unfortunate is ludicrous” to quote AMD. The same applies to schools - they have a bottomline to protect as well as any lender. College tuition costs are a good 6% higher than the national inflationary rate - why aren’t people screaming about that? Only in the last year schools like Harvard and Stanford that have obscene endowments have turn some of that back into providing tuition assistence to students to avoid coming public scrutiny.
April 27th, 2008 at 3:23 pm
Rolling back the lender subsidy cuts College Cost Reduction and Access Act of 2007 will not solve the problems experienced by education lenders.
Lender spreads have a top, a bottom, and a middle. The cuts to the lender subsidies brought the top down by roughly 65 to 72 basis points. The credit crisis, however, has brought up the bottom by 137 basis points. (A lender recently securitized pre-10/1/07 FFELP loans at a weighted average margin over LIBOR of 144 basis points, compared with 7 basis points the year before.) The credit crisis has also squeezed the middle by increasing the index rate mismatch between the Commercial Paper Rate and LIBOR indexes from 12 bp to as much as 48 bp, a 36 bp increase. (The index rate mismatch is volatile, but on average seems to have increased by 14 bp on average.)
This is first and foremost a liquidity crisis. The supply of loans pending securitization far exceeds investor demand for such securitizations. This is driving cost of funds to unsustainable levels.
The CCRAA07 lender subsidy cuts would not have been a problem if not for the subprime mortgage credit crisis. Moreover, the increased cost of funds is occuring on securitizations of FFELP loans originated before October 1, 2007, the effective date of the CCRAA cuts. So even without the CCRAA’s cuts, the current problems would still have occured (perhaps taking an additional month or two to reach the current state).
If Congress wants a viable FFEL program, it needs to take steps to temporarily inject liquidity into the federally-guaranteed education loan program. Otherwise, Congress and the administration need to take steps to minimize the likelihood of disruption during a possible crash conversion to the Direct Loan program. This includes streamlining the process for certifying a school for the Direct Loan program and establishing an alternative originator for the Direct Loan program.
Mark Kantrowitz
Publisher, FinAid.org