Higher Ed Watch

White House, Fed Move on Student Loans

Lawmakers Mobilize to Boost G.I. Education Benefits

Education Department Puts Off Review of ABA as Law School Accreditor

Coalition Offers Help to Schools Considering Switch to Direct Lending

When the National Collegiate Athletic Association announced its penalties for poor athlete academic performance this week, it let many high-profile Division I college basketball and football teams off the hook.

After four years of collecting data, the organization was set to enact full scholarship penalties for teams that fail to keep their athletes on track to graduate. But because of the NCAA's generous use of waivers for wealthy, high-profile athletic programs, as well as a flawed penalty structure, many teams with poor academic records found themselves in the clear.

Under the NCAA's Academic Progress Rates (APR) system, teams get points each semester for retaining athletes and for keeping them academically eligible. The NCAA has a system of penalties for teams that post low APRs. For the past three years, most teams have not been subject to the penalties, however, because of squad-size adjustments, or exemptions due to insufficient data.

Federal Reserve Chairman Ben Bernanke says the government’s biggest student loan program, the Federal Family Education Loan (FFEL) program, is poorly designed. His suggested solution sounds a lot like an endorsement for an auction. In a letter to Sen. Chris Dodd (D-CT) on Federal Reserve action to help student lenders weather credit market turmoil, Bernanke notes that the structure of the FFEL program is problematic. He writes:

The other side of the profitability equation--the reimbursement spread paid to lenders under this program--is under the control of the Congress and the executive branch. In particular, Congress may well wish to revisit the question of whether setting a fixed spread over the commercial paper rate is the best approach. You may decide that a more market-sensitive approach--flexible enough to provide a wider spread during times of market stress and a narrower one during normal times--could provide a more robust structure.

Here is what’s behind Bernanke’s assessment of the FFEL program and his suggestion for a "more market sensitive approach."

Two Parts to the FFEL Profit Equation

By Art Hauptman

Current arrangements for providing financial support to college students and their families in this country are not meeting many of the objectives for which they were intended. The Spellings Commission summed it up well in its final report: "The entire financial aid system - including federal, state, institutional, and private programs - is confusing, complex, inefficient, duplicative, and frequently does not direct aid to students who truly need it." As a result, the Commission and a number of other groups with wide ranging political agendas have recommended that "the entire student financial system be restructured". But what would that entail?

Since first established in the 1960s, the federal student aid programs of grants, loans, and work-study - in concert with state, institutional, and private efforts - have provided access to a postsecondary education for millions of Americans who otherwise might not have had enough funds to attend. More recently, federal tax offsets against current tuition expenses and tax-preferred incentives for college savings serve as an important source of financial relief for hard-pressed taxpayers from a range of incomes who worry that they will be unable to pay the constantly mounting bill for tuition and other expenses.

Student Loan Credit Crunch Bill Sent to President

One in Five Colleges Considering Switch to Direct Lending

Tuition On the Rise, but Spending for Instruction is Not

Report Calls for Revised Pell Grant Formula

We have written a lot recently about Silver State Helicopters, a Nevada-based company that left the 2,500 students who attended its flight academies in the lurch when it shut its doors without warning on Super Bowl Sunday and filed for bankruptcy liquidation.

As we noted yesterday, Silver States' entire existence depended on the willingness of loan companies -- in this case, the infamous Student Loan Xpress and the Pennsylvania Higher Education Assistance Agency (PHEAA) through its national brand American Education Services -- to make and service high-cost private loans to help students cover the $70,000 cost that they were required to pay up front to attend the unlicensed and unaccredited flight schools. Unfortunately, Silver State students are now stuck repaying these private loans for training they did not ultimately receive.

Silver State is hardly an isolated case.

With calls from student loan providers for a bailout growing louder every day, it's worth remembering that the lenders have brought a good part of these problems onto themselves. Investors are wary of purchasing student loan asset back securities, and, and least when it comes to those made up of private loans, they have good reason. Lenders have dumped lots of bad loans made to subprime borrowers going to dubious schools onto the marketplace, knowing full well that much of this debt was likely to go into default.

Case in point: as we noted last week, there has been in recent years a proliferation of unlicensed, unaccredited trade schools that do not participate in the federal student aid programs and therefore go largely unregulated. The growth of these schools of dubious quality has been fueled by student loan companies that have willingly and irresponsibly "partnered" with these institutions to provide high-cost private loans to often at-risk students that these schools tend to attract. The lenders have then turned around and, like subprime mortgage lenders, securitized the loans, shifting the risk of the loans onto unsuspecting investors.

By Art Hauptman

Congress and the Bush administration wisely are trying to ensure that the broadening housing credit crisis does not engulf higher education and thus prevent many college students from being able to borrow. But they need to be careful not to overreact and make matters worse.

First, it's important to understand the problem. Thus far, it is not with the federal student loan programs as some have suggested. Relative to their overall number, few lenders have withdrawn from the federally guaranteed programs and federal Direct Loans remain a viable option.

The student loan credit crunch problem instead is in the burgeoning private student loan market that now accounts for one-fifth of all borrowing for postsecondary education. The private student loan market has grown because federal loan limits are insufficient to meet demand, particularly among students enrolled in most proprietary trade schools and many private, nonprofit institutions. Unsecured private student loans to high-risk borrowers are drying up as many lenders confront the reality of much more limited access to capital.

No Federal Borrowing for Lenders, Administration Says

Elite Colleges Enrolling Fewer Low-Income Students

Substantial Black-White Graduation Gaps in College Too

Iowa Law To Rein in Questionable Lending Activity 

Representatives of the same student loan providers who ripped-off taxpayers more than $1 billion a year through use and abuse of the so-called "9.5 percent loan" legislative loophole are at it once again. This time, this special group of lenders is quietly lobbying for a lucrative carve out (also ready to be exploited) in pending student loan credit crunch legislation.

Inside Higher Ed reported the money grab story yesterday, but we've got more details on the proposal that the Education Finance Council is peddling on Capitol Hill. See their legislative language below.

We've bolded some of the most notable elements like entitling the lender to a government purchase of their product, setting a price in statute, mandating no servicer change on the relevant loans, etc, etc... And of course the proposal gives taxpayers nothing in return in the way of business practice reform, like say, banning the mingling of private and federal student loan assets, a cash reserve requirement to avoid this problem in the future, or perish the thought, restrictions on executive compensation.