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NASFAA's Misplaced Priorities
The National Association of Student Financial Aid Administrators (NASFAA) is at it again -- raising panic levels to pressure policymakers to provide a massive bailout of the student loan industry. This time, the group's focus is on ensuring that lenders and colleges can continue to offer expensive private loans to high-risk borrowers.
On Monday, NASFAA President and CEO Phillip Day (pictured) sent a letter to both
Treasury Secretary Henry Paulson and Education Secretary Margaret Spellings asking for their assurances that they will use a portion of the $700 billion bailout package to provide liquidity to companies that make private student loans. Praising the efforts Congress and the Bush administration have made to assist lenders that participate in the Federal Family Education Loan (FFEL) program, Day urged Paulson and Spellings to take "similar effective actions to ensure credit financing is available for those private educational loan borrowers that need it in order to pay postsecondary education expenses."
"Surely," he continued, "private education loans must be considered ‘troubled loan assets' and action is needed to correct this marketplace dysfunction." [The bailout package Congress approved in October gives the Treasury Secretary the authority to purchase "troubled assets."]
We agree with Day that private student loans are troubled loan assets -- for many of the financially needy borrowers who take them out. As we've written repeatedly, private loans are the most toxic form of student debt available with their high variable interest rates and lack of basic consumer protections. As with subprime mortgages, the lowest income borrowers are often stuck with the highest rates and the worst terms on these loans. And borrowers who have difficulty repaying the loans often have no way out - as private student loan providers have been uniformly inflexible in offering repayment relief. In addition, federal law makes it extremely difficult for financially distressed borrowers to discharge private loans in bankruptcy.
None of this seems to trouble Day. Instead, his sole concern is that the flow of private loans continues unabated. "Without government intervention and correction of this aberration, countless students will be denied the financing they need to reach their higher education goals," he wrote.
Day, however, is grossly exaggerating. For one thing, only about 8 percent of last year's college graduates held private loans, according to the Project on Student Debt. The vast majority of students who take out loans to pay for college get them through the federal loan programs.
Undergraduates who take out private loans tend to be concentrated at high-priced private colleges and for-profit trade schools. Now Day is correct in noting that lenders are imposing stricter credit requirements on students and are requiring students with less-than-stellar credit to have their parents co-sign the loans. But is this really a bad thing? For too long, schools and lenders engaged in sweetheart deals that made it too easy for them too load up students with excessive amounts of debt. Is it any wonder that delinquencies and defaults on these loans are growing dramatically?
Rather than lobbying administration officials to reinstate a potentially dangerous debt instrument, NASFAA and its members would better serve students by redoubling their efforts to make sure borrowers exhaust the still widely available federal loans. There is substantial evidence that many students and families fail to exhaust their federal loan options (including the still widely available Stafford loans and PLUS loans, which cover up to cost of attendance) before turning to more expensive private loans. For example, they could urge members to do what Colorado State University and Barnard College did -- require conversations with borrowers before certifying private loans. These programs led to significant decreases in private loan borrowing at both schools, as students became aware of their federal loan options. This was even true at Barnard where the complete cost of attendance is over $50,000.
NASFAA members could also reexamine their own institutional aid policies to make sure that their precious dollars aren't going to "merit aid," but are instead helping needy students. That would ensure that students who can ill afford private loans won't be forced to take them out so that their schools can recruit wealthier students.
Either way, it's extremely unfortunate that NASFAA isn't focusing its efforts on trying to reduce students' reliance on private loans. Instead, the group seems only too willing to help the lending companies continue to heap this high-cost debt on students.
"Panicked" is a good
"Panicked" is a good description of this letter. At the very least, it is shortsighted. At a time when we are hearing that colleges' endowments are losing money and that they might have to cut their grant aid and put their building plans on hold, why aren't they thinking about how they can compete for students?
With private lenders out of the market, there is a vacuum just waiting to be filled. Colleges and universities should aggressively move towards setting up (or expanding) their own loan programs. It is cheaper than grants; it is self-sustaining; and it will be attractive to students and their families. Why do these idiots want private lenders back?
University student loans
Loans ain't free
re: collegeloanconsultant Where exactly would colleges and universities generate the cash flow necessary to set up their own private loan system? While the big kahunas have endowments that could possibly be used that way, the vast majority of institutions do not have the financial resources to become lenders. That's why they favor external assistance. Most institutions don't care from whence the tuition money comes, so long as the tuition money comes. Federal loans, private loans, it's all cash to the majority of institutions that run their operations purely on tuition revenue.
While the Feds should continue to oversee the cleanup of private loans, for high tuition schools, they are acting in a logical fashion by asking for extraordinary assistance. The alternative would be to increase the Federal loan limits, which I hope we all agree would be a disaster.
The Post is Right
For once the Washington Post's editorial board got it right. They called Paulson's recent step to address problems in the auto, credit card and student loan markets "pragmatic and probably wise." Real people at good colleges are going to be hurt unless private loans become available.
Private Loans
More funds availalbe in private loans is not going to solve one of the credit freeze problems- increasingly tightening credit standards. Borrowers and co-signers that would have received loans a year ago are now being turned down because standards for lending have contracted. I am not sure that providing more funding will make loan providers willing to take more risk. So, the market for students who do not have co-signers has dried up as has the market for the less attractive risks. We have not found that there are too few lenders making loans, but that there are greatly limited opportunties with the lenders.
NASFAA's Priorities
As a long-time financial aid administrator who has had the pleasure of working with NASFAA on a number of committees over the years, I am always amazed at the tone of these articles. While it is certainly fair to take issue with NASFAA's policies and statements and have a vigorous debate on the merits, why is there a need to portray NASFAA as the bad guys? NASFAA has always championed the need to provide substantial grant assistance for the neediest of students. NASFAA has for years begged Congress and the White House to make the Pell grant program a true entitlement program.
In all of my dealings, I never felt that they were some shill for the lending community. Whatever mistakes were made in the past, they have been addressed and dealt with in a broad educational forum. When I was a non-voting board member a few years ago, a number of us expressed concern that many middle-class families who depend on these private loans would not be able to get them. This publication would have a lot more credibility if it turned down the hyperbole. To suggest that NASFAA does not spend considerable time training its members on proper packaging policies (i.e. best aid first, then low interest loans, etc) is simply wrong. Like any organization, NASFAA will make it share of mistakes. But why demonize NASFAA and Dr. Day?
I told Sallie I would
I told Sallie I would commit suicide when I went Broke!! There reaction was NO REPLY!!! Even my Doctor signed the form.
Student loans
Instead of "bailing out" student loan lenders - private or otherwise -why not bail out the students who are in much greater need of "bail-out"! Just how many students could attend college if that "bail out" money were provided to THEM (NOT the lender) as grants. Even further, why shouldn't higher education be paid for by the federal government? How many students could get an education if the money used to kill people in Iraq were spent on education in America. This doesn't apply just to public schools for grades k-12. This should apply to ALL education through at a minimum of a Bachelor's Degree.
If you graduate with ONLY a Batchelor Degree, don't expect to earn enough to repay your loans! Our society has gone beyond getting paid a lot more if you have JUST a lower-level degree. Earning enough to support yourself and a family in the manner everyone envisions with a Bachelor's degree, in reality, is actually earned by those who haven't attended college but have a profession, such as a plumber, electrician, etc. and those who have a Master's Degree or a professional degree such as a JD, MBA, MD etc. Those with a BA or BS, generally, have only a lifetime of repaying student loans to look forward to. The whole "higher education" thing has become one big scam! We are indoctrinated that we MUST go to college. But we are NOT TOLD the consequences of going about it by borrowing money that is still too easy to get.
I'm not saying DON'T go to college. If you do, PAY FOR IT YOURSELF! Parents start saving. Students start saving from summer jobs, or from taking a year off before starting college, or by taking advantage of state sponsored programs that allow students to take college courses while in high school and then attend community colleges and finish off at a state supported college university. North Carolina, from what I have heard advertised, has just such a program.
There are ways of attending college without pledging yourself to a lifetime of harassment and demands from student loan lenders who make more from the federal government if students default, and who, with the solid support and full enforcement rights of the federal government will take the money you and your family need just to live. And when the baby boomers who could not repay their loans start receiving Social Security which the student loan lenders can garnish, you will see ANOTHER financial crisis similar to what we are now seeing with Wall Street - only there is no one in the government giving money to these people (who gave it to the federal government in the first place). What will we do when retired baby boomers, who have lost a great deal of their retirement recently and who are just getting ready to retire, no longer have the spending power they had? If you think the greed of the mortgage lenders has hurt our economy - and I assume we all understand that the "mortgage crisis" that many of us saw coming has almost devastated our economy as well as the economies of other nations, just wait until the baby boomers have their Social Security garnished and must rely on the government to support them! Then what? Will the feds step up to HELP the PEOPLE? Do you REALLY think so???
I propose amnesty for everyone who has defaulted on their student loans - if and ONLY if - the student loan lender CANNOT provide a complete accounting that shows WHY the student OWES the amount the lender says is owed. If student loans continue to have the protection of the feds and the borrowers don't ("of the people, by the people, FOR the people"!) the student loan lenders MUST be forced to be ACCOUNTABLE for the amounts they demand, not unlike Chrysler, GM and Ford. How many of the CEOs from SallieMae and other lenders have their own jets and earn millions a year? Don't know? Then it's time to find out! How many people would blindly pay a bill they received in the mail for $60,000, even if they know where it came from but did NOT know why it was so high? Would you? That’s why there are so many defaults! EVERYTIME the lender or holder of the loan does something - ANYTHING - with the loan, there are additional penalties and added "other" expenses added to the balance being demanded without ANY notice whatsoever to the student. It is the student loan lenders who have the RIGHTS in this country - NOT the PEOPLE!
Some of the people in government are starting to recognize that student loans are a problem. But are they going to wait until it becomes another crisis to do something? The auto makers SHOULD HAVE been forced to start researching other fuels sources in the ‘70s when we have the first gas crisis. But the cost of oil went down and we all forgot about it. However, I think – I HOPE – that we have all learned that hiding your head in the sand does not make the problem go away. Fortunately Congress has called the major car makers on the carpet for ASSUMING they could fly into Washington in their private jets, flaunting their wealth, and assuming as a matter of course (as it has been in the past, especially the past eight years) that they will get anything they ask for. Why apply this ONLY to auto makers? Why not apply this to ALL major corporations – or at least the ones asking for money from the feds, or who have the power of the federal government solidly behind them to enforce laws that only the feds can enforce, including the student loan industry? Don’t you think it’s about time?
Why help the middle or under-middle class get loans?
Why is everybody so riled up about people who can't afford college getting loans so they can attend college? If you think college costs a lot, just wait until you try to REPAY the loan you got with the job you didn't get because IT DOESN'T EXIST! One reason they don't exist is because Congress signed legislation to increase the number of foreign h1-b workers allowed to work in the U.S. Why? Because organizations like ITAA complained that there aren't enough American workers in the IT industry! And there are a lot more reasons that I won't go into because there isn't enough time.So by giving handouts to the lenders, what is happening is that people who can't afford college and loan repayment are going to college anyway, and then defaulting because of underpaying take-it-or-leave-it jobs or no jobs at all, which is far more profitable to lenders than merely having the loan repaid.Shame on Congress! Again.
good post, but aren't loans bad in general?
good post, good analysis. I totally agree with you. However, from a libertarian viewpoint the public sponsorship of student loans just guarantees that universities that can't keep their costs down don't need to worry about it and just assume infinite tuition growth. Universities need a reality check. and the loan system needs a rework. thanks, Michael Staton
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