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.
Under heavy pressure from Sallie Mae and nonprofit student loan providers, Bush administration officials are reportedly considering allowing lenders to compete to service federal loans they have sold to the agency. This would be a reversal, as the Department initially planned to put its current Direct Loan servicer, Affiliated Computer Services Inc., in charge of collecting on these loans. Lenders complained about the decision (and Sallie Mae filed a formal protest with the Government Accountability Office), arguing that they should be put in charge of servicing the loans they sell to the government. In effect, these lenders want to have their cake and eat it too - unloading their loans on the Department when they have difficulty selling them yet still profiting on them by collecting payments on them for the government. We would hope that Department officials think twice before serving that cake on a silver platter.
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.