Higher Ed Watch - logo

Student Loan Frenzy

We said it before and we'll say it again. There is no federal student loan crisis. To date, we have not heard of a single student who has been unable to obtain a federal student loan. In fact, according to the U.S. Department of Education, student loan originations are up this year in both the Direct Loan and the Federal Family Education Loan (FFEL) programs, despite the turmoil in the financial markets.

But you wouldn't know it judging by the frenzy of activity occurring on both sides of Pennsylvania Avenue. Congress and the Bush administration remain worried about student loan availability. We would caution them that reacting to panicked news accounts of credit market turmoil affecting student loans -- without carefully considering the implications of further action -- could actually do student borrowers more harm than good. We are particularly concerned that some policymakers, in giving in to the scare tactics employed by the student loan industry, may in fact be positioning student lenders, as well as high-priced colleges, to game the system to their advantage.

Here are some recent actions as well as rumored proposals that we are particularly concerned about:

  • The U.S. Department of Education announced on Friday that, starting in the 2009-10 academic year, it will begin serving as "the buyer of last resort" for loans made as far back as 2003. Aimed at the securitization market, this new plan has the government providing a liquidity backstop for private securities used to finance federal loans. Because it applies to loans made as far back as 2003, the plan will allow lenders to sell (and securitize) older loans that they now hold on their books, freeing up money that might be made to make more loans. While we can understand why the federal government is trying to spur private investment in FFEL loans, we are uncertain about why the government needs to act now. As we noted earlier, FFEL volume is up this year, and students are continuing to get federal loans. Meanwhile, there is no guarantee that lenders will use the help they get to make new loans.

  • Rumors also abound that some members of Congress are contemplating proposals that would increase federal student loan limits, with the economic stimulus package as a possible vehicle by which to push them through. We have been told that their aim is to help financially needy students having difficulty obtaining high-cost private loans to pay for college. At Higher Ed Watch, we think it would be a big mistake to load additional debt on students who can ill afford it, especially given the tough economic times that still lie ahead. Clearly, now is not the time to raise loan limits for a population which by definition (not working, no collateral) is overwhelmingly made up of subprime borrowers. Remember also, in the overwhelming majority of cases, student loans are not dischargeable in bankruptcy. To create more paths for students to go into further debt from which they have no way to get out from under is irresponsible and in most cases, unnecessary.

    It's also worth remembering that the parents of most students attending high-cost colleges are eligible to receive federal PLUS loans, which cover the full cost of attendance. For families who get turned down for PLUS loans because of credit worthiness, Stafford loan limits double making them eligible for $57,500 in aggregate federal loans. Granted this still may not be enough to pay the price of particularly expensive institutions. Several newspaper accounts have drawn attention to the phenomena of parents and students spending more time "shopping around" this year before committing to a university. But is shopping around so bad? Shouldn't we encourage families to spend more time thinking about the levels of debt they and their children can incur and reasonably expect to pay back?

    And let's not forget about the colleges. If we raise aggregate loan limits for the second time this year, we are giving high priced colleges an excuse to continue raising their prices and to continue shifting limited institutional aid from financially distressed students to students that are more desirable given their admissions portfolio. To the extent that aid shifts and tuition rises, any increase in loan limits will have been for not.

Policymakers should not allow panic to get the better of them. Students and taxpayers deserve better.

No federal loan should be a

No federal loan should be a blank check to colleges and universities, but it is clear that parents have been the ones harder hit by the economy, not students. They are the ones who have seen their retirement savings and homes lose value.

It is reasonable to try and shift some of the debt burden from parents to students at this time, but the increased loan amounts should only go to those students whose colleges have contained tuition costs instead of increasing them. Other schools should be warned that they will lose the standard Stafford loans unless they show that they are holding tuition costs down.

Parent college loans

When the idealogues at the

When the idealogues at the New America Foundation can demonstrate that there won't be a problem getting federal student loans in academic year 2009-10, then come back to us with a coherent criticism.

The recent decision by the Adminstration is not about this academic year.

But of course you knew that.

Does ACS offshore any Federal Direct Loan work?

I keep up with your columns on student loans, but I would find them more credible if they were more balanced. For example, you would deny Sallie and others the chance to bid for the servicing of these loans, assuming that ACS is some moral force in the universe. Surely your research would support that the taxpayer is getting much more favorable terms from ACS since they had to bid against Sallie last go round. Come now--print it. Why not let them get beat down again on their costs to the taxpayer--isn't that really the worst that could happen here? A better deal for the taxpayer? No harm to the student borrower there, either. So Sallie makes a buck--she'll earn it and save us all a buck doing it if she wins the contract. Now then, where is your expose on ACS offshoring Direct Loan work? Do you want to know about it? Will you print it if you discover it to be true? (You may get to go to Jamaica for research also.) Maybe it is just rumors. I'm not the reporter here. Is your biggest concern about securitization backing that the lenders WILL lend? As private loans?

There *IS* a student loan crisis - but not the one they admit.

The real crisis with student loans is one the media will not discuss at all. It is a crisis the way the student loans have had consumer protections removed from them, and how they are now being used as a tool to enslave 3 generations of students to debt that they can never eliminate.

Student loans which are balloning faster than the the students ability to pay. Loans which alleged amounts due consist of 80 percent of "created debt", that is amounts created with a stroke of a pen, via penalties and punative damages, which then collect interest when the student cannot pay due to financial crisis. The crisis of these students who thought the jobs would be there, and then find out they are not - and are strapped with the debt for ever. The crisis of the fact that the US Congress knew of a group of students in the 80's, that were victimized by predatory trade schools, engaged in 'student loan farming', yet they have never offered any kind of relief for those kids.

The real crisis, is the crisis of DENIAL by the US government, US Dept of Education, and the student loan industry that real default rates are closer to 50 percent when you track the loans past the 2 year tracking period that the USDept of Ed tracks them, and extend that period to the life of the loans.

you betcha

The creative debt put on student loan tabs with those excessive fees is criminal. It's hard enough for students to pay back their student loans in the first place and then to have late/collection fees piled on causing twice as much debt as the original loan is crazy. Why not offer students an "amnesty" period at which time, they can pay back their student loans without these excessive fees. Then, the original principle is paid back plus maybe a very small surcharge and the student's can live their lives without this huge albatross over their heads for the rest of their lives. This makes good sense, doesn't it? Obama, are you listening?