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Skewed Priorities in New York

In yet another example of how politicians are overreacting to the panic over the credit crunch, officials in New York are considering spending $50 million in the coming fiscal year to create a new state-sponsored private student loan program.

The proposal, included in Gov. David Paterson's 2009-10 fiscal year budget request, aims to keep up a steady flow of private loans to New York State students. It is also designed to provide a lower cost alternative loan product than is generally available from commercial lenders.

Under the program, credit-worthy undergraduates would be eligible to receive up to $10,000 in private loans annually, and $50,000 cumulatively, after they have exhausted their federal student loan eligibility (not counting PLUS loans). Students would have the option of taking out either fixed-rate or variable rate loans. The plan calls for the state to issue $350 million in tax-free bonds to finance the fixed rate loans -- and the interest rate on these loans would reflect the interest rates paid on these bonds. State officials say they expect the rate to be around 8 percent in the program's first year.

The rate on the variable loan product would be tied to the prime rate with a mark up to be determined by the New York State Higher Education Services Corporation (HESC), the state student loan guarantee agency, which would be running the program. HESC would also determine the amount of fees it would charge students for taking out these loans.

"In a time of rising borrowing costs and tightening lending by private banks, this new lower-interest student loan program I have proposed will help ensure New Yorkers have access to the funds they need to finance their college educations," Governor Paterson said in December, when he unveiled the proposal.

James Ross, the president of HESC, has also been busy promoting the program. "As the nation works through the financial crisis, such innovative programs are needed to help keep the doors of higher education open to all New Yorkers and maintain a highly educated workforce," he stated in testimony he delivered last week at a state legislative hearing.

But state legislators, don't believe the hype. While the program would undoubtedly provide some students with cheaper private loans than they would be able to obtain otherwise, and has some other positive features, the benefits of the loans are not nearly as generous as advertised. The authorizing legislation creating the program leaves it up to HESC to set most of the terms and conditions on the loans. In fact, the proposal explicitly exempts the program from state usury laws and declares that "there shall be no limitation on the rate or amount of interest or fees payable on education loans made under this program."

Moreover, we are not entirely clear on the overriding public purpose that this program is designed to serve. As of yet, we at Higher Ed Watch have not seen any solid evidence that credit-worthy students - those that this program would serve - are having difficulty obtaining the financing they need (through the federal or private loans programs) to go to college. Remember that 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, as we've asked before, 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?

At a time when New York State officials are considering making substantial budget cuts to the state university and community college systems, raising the tuition and fees students at these schools pay, and tightening eligibility for the state's need-based grant program, surely there are better ways to spend scarce resources than to push students further into debt.

Next week, we will take a more-detailed look at the proposal to point out the best and worst features of the program. Stay tuned.

Comments

New York State loan program

An affordable state student loan program was passed by the New York State Senate this past summer. Does anyone remember the "I Live New York" loan program? There are two reasons why that bill was much better for students than the current proposal- the interest rate was lower (6% fixed) and these loans would have been forgivable if the graduate remained in New York State and worked there.

Question for Mr. Burd

Have you ever met a student loan program that you like? Two other points: Just because you haven't seen data that shows that creditworthy students can't get private loans doesn't mean that they are. Moreover, the interest rates on PLUS loans ain't so great.

NYS student loan proposal

The fact is that even with PLUS being available, NY students and parents still took out around $2 billion in private loans last year, some with interest rates approaching 20%, with 6% fees, and payments for 25 years. Those rates are outrageous. And, folks who could borrow last year with a 640 FICO score find themselves ineligible this year unless they have a 710 score or higher. Their parents' ability to find a home equity line is gone as well.

NYHELPs addresses the gap in college financing after requiring application for, and receipt of federal Pell Grants, State TAP grants, and federal Stafford loans - reducing the amount borrowered, something private loan programs don't do. Required financial literacy courses and the comparison shopping available through NY's Student Loan Marketplace will ensure that students receive the best rates and terms, and that they understand their responsibities before signing for a loan.

Bordering on the ridiculous

Mr. Burd, you are a gem. Thank goodness SOMEONE is trying to look out for the rest of us. This whole private student loan thing is spinning out of control. New York, of all places! They have Andrew Cuomo slapping down the lenders with one hand, and then they give a thumbs up to creating their own Sallie Mae-type predatory private loan scheme. Positively unbelievable. Students & Parents beware. Don't fall for it don't fall for it don't fall for it ....You may think you're doing your college bound child a favor by giving them a bright future with a college education. But you're setting them up as debt slaves for life. You obviously are not wealthy or you wouldn't have to borrow at such usurious terms to send your child to college. Picture your old age, when your social security check is attached by the lender until the day you die. It's happening now, people.