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.