Credit Crunch

Higher Ed Roundup: Week of May 12 - May 16

Ed Policy — Thu, 15 May 2008 19:16:00 -0400

Credit Crunch Easing for Student Loan Providers?

Dept. of Ed Relaxes Preferred Lender Rules

Sallie Mae Computer Glitch Sends Credit Scores Falling

Report Illustrates Disparities Between States in Community College Use

Credit Crunch Easing for Student Loan Providers?

There were signs this week that the effects of the credit crunch on the student loan industry may be lifting. Nelnet, a Nebraska-based lender, successfully sold $1.35 billion worth of bonds backed by federal student loans this week with substantially lower financing costs than its previous sales. Industry experts took this as a positive sign that investors are becoming less wary of federal student loans, which have long been considered among the safest investments because of their implicit backing from the government. Nelnet's sale follows on the heels of favorable sales of student loan bonds by JP Morgan Chase and the Rhode Island Student Loan Authority. The latter was the first successful "U.S. municipal offering backed by student loan revenue this year," according to Bloomberg News. Speaking at a loan industry conference on Thursday, some investment banking officials expressed cautious optimism. "We've still got a long ways to go," a Bank of America representative told the Chronicle of Higher Education. "But at least we're headed in the right direction."

Dept. of Ed Relaxes Preferred Lender Rules

Just months after the Department of Education put into place new regulations governing the relationship between colleges and federal student loan providers, the agency appears to be backing off to some extent. In a letter to colleges last Friday, a top Education Department official said that as a result of the credit crunch, some colleges may have trouble complying with the requirement that they recommend no fewer than three unaffiliated lenders to their students. In such cases, colleges will be allowed to recommend fewer lenders, as long as they make clear that they are not endorsing a specific loan provider. Under criticism from groups representing financial-aid administrators and the loan industry, the Department also reversed an earlier interpretation of the rules that would have blocked colleges from including affiliated loan providers on their preferred lender lists. As long as schools list at least three unaffiliated lenders, they now can add others that have the same owners. While college and lender lobbyists applauded the Department for being flexible, some advocates for students questioned whether the agency is relaxing the rules because the student loan scandals have receded from the headlines.

Sallie Mae Computer Glitch Sends Credit Scores Falling

Nearly one million student loan borrowers saw their credit scores plunge last weekend because a computer glitch at Sallie Mae caused their accounts to be coded as delinquent. On Friday, the student-loan giant mistakenly included borrowers who have taken advantage of graduated and extended repayment plans among those who have made only partial payments, leading the credit reporting firm Equifax to label their loans as overdue. As a result of the error, some borrowers' credit scores dropped by as much as 100 points or more. A Sallie Mae spokesman said that the situation has been corrected and that borrowers should not face any penalties as a result of the snafu.

Report Illustrates Disparities Between States in Community College Use

States that charge lower tuition for community colleges have higher enrollment rates, according to a new report from the Rockefeller Institute of Government in New York. Average tuition in California, which enrolls more than 5 percent of its 18-plus aged population in community colleges was $674 whereas New Hampshire, which charges $5,614 annually, has a community college enrollment rate of less than 1.5 percent. In all states, the cost of attending a community college is less than attending a four-year college and in 18 states, the community college tuition was half that of a four-year school or less. States with the smallest population, such as West Virginia and Maine, posted the largest growth rates in community college enrollment between 2000 and 2005 (66.7 and 40.5 percent, respectively).

Loans of Last Resort: A Program Only Rube Goldberg Could Love

Ben Miller — Thu, 15 May 2008 15:58:00 -0400

The Department of Education recently announced modifications to its lender of last resort program as part of its effort to prepare for the possibility of federal student loan shortages as a result of the credit crunch. The net result is a contraption Rube Goldberg would be proud of -- what in effect are direct student loans that are more difficult to administer and more costly for taxpayers than the regular Direct Loan program.

The lender of last resort (LLR) program is designed to ensure all students have access to Federal Family Education Loans (FFEL) by requiring that guaranty agencies provide loans to students that have been turned down by conventional lenders. Though we support guaranteeing access to student loans, the similarities (and costly differences) to the regular Direct Loan program make LLR a significantly inferior option. In fact, Washington appears to be trying to avoid the more obvious and efficient solution -- boosting the regular Direct Loan program.

Here are five similarities between the new but hardly improved LLR program and the regular Direct Loan program:

Federal Guarantee: While the government reimburses lenders for 97 percent of a FFEL loan that goes into default, it is on the hook for 100 percent of an LLR loan. Since Direct Loans are obligations from the U.S. Treasury, they effectively have a 100 percent guarantee.

Funding Source: The Secretary of Education is permitted to advance U.S. Treasury funds to guaranty agencies for the purposes of making LLR loans. The Department disburses Direct Loans using Treasury funds.

Terms and Conditions: According to the Department of Education, borrowers who take out an LLR loan will have "the same rights, benefits, and obligations" as those who receive FFEL loans. Federal law also requires that Direct Loans have the same terms and conditions as those offered through FFEL.

School-wide Eligibility: Currently, student loan applicants become eligible for a LLR loan only after they have been turned down by two FFEL lenders (only one in some states). However, under the recently signed Ensuring Continued Access to Student Loans Act of 2008, the Education Secretary will be able to designate whole institutions as eligible for LLR loans. Schools using Direct Loans also receive institution-wide eligibility.

Loan Ownership: Similar to Direct Loans, LLR loans made with advanced Treasury funds are assets of the U.S. government.

So let's get this straight. Under the LLR program, loans would be made with Treasury funds and have the same terms and conditions as FFEL loans. They would carry a 100 percent guarantee, and could be granted on an institution-wide basis.

If it looks like a Direct Loan and it functions like a Direct Loan...

But the LLR program isn't a carbon copy of the regular Direct Loan program. In fact, the Department has added provisions that make the program more complicated and costly to taxpayers, such as:

Requiring Additional Federal Payments: With the regular Direct Loan program, the government's initial expenditure is equal to the principal of the loan. But under LLR, the Department would provide a fee to a guaranty agency for "originating and servicing LLR loans made with advances." The government would thus provide money to make the loan and then give the guaranty agency MORE money to agree to originate a loan with ZERO default risk.

Designating the Debt as FFEL Loans: As we noted earlier, borrowers have nearly the same terms under the two federal student loan programs, with at least one notable difference: Direct Loans can be partially forgiven for public service. Under the Department's LLR plans, however, the guaranty agency must assign to the Secretary any loans made with federal advances that she requests. These assigned assets will still be considered FFEL loans, meaning a borrower could end up with a loan owned by the government with inferior terms to other Department-held loans.

A K.I.S.S. for the Department

The Department has put a lot of effort into ensuring the LLR program functions properly. But is it worth the trouble? The government has never put LLR to use on a wide scale before. Do schools really want to put their trust in an unproven system? A regular Direct Loan could provide better terms for borrowers, with the same financing source, school-wide eligibility, and guarantee rate -- without having to make additional payments to other agencies.

If this is the general direction the Department wants to pursue in response to the credit crunch scare, it should follow a lesson we all learned in elementary school -- when faced with complex problems, the best solution is to keep it simple, stupid.

Higher Ed Roundup: Week of May 5 - May 9

Ed Policy — Thu, 08 May 2008 17:44:00 -0400

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

White House, Fed Move on Student Loans

President Bush signed a bill into law on Wednesday that aims to increase federal loan options for students and ease the effects of the credit crunch for lenders that participate in the Federal Family Education Loan (FFEL) program. The measure will increase the annual and aggregate federal unsubsidized Stafford loan limits, allow parents to defer payments on PLUS loans while their children are in school, and establish the Department of Education as a "secondary lender of last resort" with the power to purchase outstanding FFEL loans and service them through the Direct Loan program. On Friday, the Federal Reserve announced that it would provide further help to lenders by allowing them to swap student loan backed securities for Treasury bills through its 28-day term lending facility. The move was designed to inject liquidity into the student loan market. Some loan companies, however, remain unsatisfied and continue to push for an even bigger bailout.

Lawmakers Mobilize to Boost G.I. Education Benefits

Congress is set to debate two competing G.I. bills that would increase education benefits for service members returning from Iraq and Afghanistan. The first bill, S.22, sponsored by Sen. Jim Webb (D-VA), would cover up to the full cost of attendance at the most expensive public college in a veteran's home state for those who served in the military after Sept. 11, 2001. Under the measure, tuition and fees would be paid directly to colleges, averaging about $1,700 a month per veteran, up from the current $1,101. The bill, which may be inserted into the $108 billion emergency Iraq War funding bill to ensure a quick vote, has received bipartisan support. The Bush Administration, however, opposes the bill, saying it would be too costly and difficult to administer, because maximum benefit awards would have to be calculated on a state-by-state basis. Administration officials also fear that the legislation would harm the country's all-volunteer force by enticing soldiers to leave the military to pursue their studies. Instead, they have thrown their support behind S. 2938, sponsored by Sen. Lindsey Graham (R-SC), which would continue the tradition of paying a fixed award directly to veterans, set at $1,500 a month. Sen. John McCain (R-AZ), the presumptive Republican presidential nominee, is backing that bill.

Education Department Puts Off Review of ABA as Law School Accreditor

The Department of Education has decided to delay its review of the American Bar Association's status as an accreditor of law schools for six months, so it can take more time to investigate allegations that the association has overstepped its authority by requiring its members to demonstrate that they are taking "concrete action" to diversify their student bodies and faculties. Over the past decade, the ABA has withstood much criticism that its standards are poorly monitored and unrelated to law school quality. But the accreditor has come under intense fire from conservative groups since 2006 when it began requiring schools to meet its "Equal Opportunity and Diversity" standard. These organizations contend that the ABA is requiring law schools to employ racial preferences that are unlawful in some states. The upcoming review, which will now take place in December, could result in the ABA losing its status as the nation's sole accreditor of law schools.

Coalition Offers Help to Schools Considering Switch to Direct Lending

The National Direct Student Loan Coalition has announced that it will step up its efforts to assist colleges considering switching into the Direct Loan program. The announcement comes on the heels of a recent survey that showed as many as 20 percent of colleges, citing instability in the student loan market as a result of the credit crunch, were thinking about transitioning from the Federal Family Education Loan program to Direct Lending. Among other things, the coalition is starting a mentor program in which officials from Direct Loan schools will help provide technical and operational advice to colleagues considering making the move. In addition, the coalition is co-hosting an online event with the National Association of College and University Business Officers on May 20 "to provide an overview of campus operations under the Direct Loan program, the steps involved in switching, and address the many questions being raised" by college officials contemplating the switch. [If interested, register for the event here]

Bernanke Says Auction

Jason Delisle — Wed, 07 May 2008 13:42:00 -0400

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

Turmoil in the credit markets has markedly increased the cost of capital for FFEL lenders, capital that they use to make student loans. Even though the loans are virtually risk free (they are guaranteed and subsidized by the federal government) the credit markets currently are demanding a hefty premium for capital compared to what was charged in the past. But while financing costs for student loan providers are problematic, they are only one side of the equation when it comes to the profitability of a FFEL loan. The other side is the subsidy paid by the federal government.

The federal government guarantees lenders an interest rate on all FFEL loans that is equal to a variable short-term market interest rate (three month commercial paper) plus a premium of 1.79 percentage points. Right now that rate equals about 4.5 percent, but fluctuates each quarter based on commercial paper interest rates. More information on this subsidy is available here.

In the past, the interest rate subsidy was sufficient to induce FFEL lenders to make loans. The cost of raising capital was low enough that the guaranteed interest rate paid on the loan produced a spread. For example, in the past a lender could borrow at 5.5 percent to make a loan, and then collect a guaranteed 7.5 percent rate by the federal government. The 2.0 percentage point spread was enough to cover the lender’s costs of origination, marketing, and leave a nice profit after taxes.

Today, however, the lenders’ cost of raising money has reduced the spread, and some lenders say it has eliminated it. As a result, lenders say that they may not make loans this fall.

FFEL Design is Risky and Wasteful

No one should be surprised. Congress has designed the FFEL program in a way that makes it susceptible to such disruptions. The guaranteed interest rate paid on the loans is arbitrary, made up by Members of Congress, and fixed in law. Some years that rate is too generous, heaping windfall profits on lenders and wasting taxpayer money. Other years, it may not be high enough to induce any lender to make loans.

What’s the solution? Well right now lenders and Members of Congress are coming up with all sorts of schemes to allow lenders to raise funds at lower, taxpayer-subsidized rates, which is intended to increase the spread lenders earn on a FFEL loan.

Use an Auction a la Ben Bernanke

Why not take Bernanke’s approach instead? Let a market set the guaranteed interest rate that the federal government pays lenders. If financing costs spike, as they have now, then the subsidy paid to lenders would adjust accordingly, ensuring a profitable spread. In less volatile years, the rate could adjust lower to ensure taxpayers weren’t paying more than they needed to fund the FFEL program.

The PLUS auction pilot set to begin next year is one model for such a system, provided one flaw is corrected. The auction sets a reserve price for bids made on the subsidy rate, capping bids at an arbitrary, fixed rate. The reserve price should be raised, and the Secretary of Education should be given the flexibility to adjust it in each auction when special circumstances arise. Details on the PLUS auction are available here.

Yes, the credit markets are partly to blame for possible disruptions in the FFEL program. But Congress is also at fault. Congress makes up the subsidies for lenders in the FFEL program and isn’t very good at getting them right. Let lenders bid for the subsidies instead. That’s how Ben Bernanke would do it.

(Image used under a Creative Commons license from flickr user trackrecord )

Higher Ed Roundup: Week of April 28 - May 2

Ed Policy — Fri, 02 May 2008 21:49:00 -0400

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

Student Loan Credit Crunch Bill Sent to President

The U.S. House of Representatives moved quickly on Thursday to give final approval to H.R. 5715, which would increase the annual and aggregate federal unsubsidized Stafford loan limits, allow parents to defer payments on PLUS loans while their children are in school, and establish the Department of Education as a "secondary lender of last resort" (one of our ideas) with the power to purchase outstanding FFEL loans and service them through the Direct Loan program. Congress put the legislation on the fast track after President Bush used his weekly radio address to highlight the need for quick action to address tight liquidity for student loan providers. The final measure includes amendments that the Senate added to the bill before approving it on Wednesday. Among other things, the bill will now sunset the Education Secretary's authority to designate entire colleges for the "lender of last resort program" at the end of the 2008-09 academic year and direct all savings derived from the legislation to increase funding for the Academic Competitiveness and SMART grant programs. The President is expected to sign the bill shortly.

One in Five Colleges Considering Switch to Direct Lending

Citing instability in the student loan market, 19 percent of colleges surveyed last week by Student Lending Analytics say that they are considering switching from the Federal Family Education Loan program to the Direct Loan program, in which the Department of Education provides loans directly to students through their college. Nearly six percent of institutions surveyed have already made the switch. So far, the largest institutions to make the move have been Indiana University at Bloomington, Michigan State, Northeastern, and Pennsylvania State Universities. Those expressing the most interest in switching programs, however, are community colleges (about 7 percent are planning to make the switch, and another 29 percent are considering doing so) and for-profit trade schools (14 percent are planning to make the switch, and another 43 percent are considering doing so.) These results are hardly surprising as several banks in recent weeks have said they plan to be more selective in making federal loans to financially-needy students attending these types of institutions.

Tuition On the Rise, but Spending for Instruction is Not

Annual tuition hikes are becoming a fact of life at pubic and private colleges around the country, but little of that additional money is going towards student instruction. A new report from The Delta Cost Project, "A Growing Imbalance: Recent Trends in U.S. Postsecondary Education Finance," finds that the percentage of institution revenue dedicated to faculty salaries and other instructional costs at private colleges increased by just 1 percent between 1998 and 2005, down from a 2.2 percent increase between 1987 and 1996. In particular, tuition revenue at public colleges, though on the rise, often did not translate into increased spending because it was used to offset decreases in state appropriations. Since 1998, student tuition has covered a larger percentage of the costs of a student education, up from 37 percent to 47 percent at public schools and up to 31 percent from 24 percent at private institutions.

Report Calls for Revised Pell Grant Formula

Planned increases to the maximum Pell Grant award are important for helping low-income students, but a new report argues that additional modifications should be made to the program to ensure that funds are better targeted to the poorest individuals. "Window of Opportunity: Targeting Federal Grant Aid to Students with the Lowest Incomes," released Monday by the Institute for Higher Education Policy, argues for changes in the Pell Grant award formula, which is determined by taking the difference between the maximum award and the student's expected family contribution (EFC). The report recommends that students be allowed to have a negative EFC of up to $750 (the current minimum is zero), in turn allowing the poorest students to receive a Pell Grant award of up to $750 beyond the maximum limit. The report also recommends increasing both the minimum and maximum Pell Grant awards.

Guest Post: Insulating Student Loans from the Credit Crunch

Ed Policy — Tue, 29 Apr 2008 15:09:00 -0400

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.

The concern among policymakers is that fewer private loans will mean less access to college and that a continuation in overall credit tightness will eventually affect federal student loans as well.

This is hardly the first time that general credit conditions have threatened the viability of federal student loans. Rising market interest rates over time led the government first to create and then increase special allowance payments to compensate lenders for the difference between student rates and market rates of interest. Concerns about limited liquidity led Congress to create Sallie Mae in 1972 and later encourage the creation of state lenders of last resort. Over time, lenders and other participants have reacted to various federal cost cutting proposals by threatening to pull out from the federal program.

The difference now is that the federal Direct Loan program exists. It can provide much needed liquidity for banks and other loan holders by buying up existing student loans, thus freeing up capital. This potential provision of liquidity, along with federal cost savings and much greater competition in the student loan market, are two principal advantages of having a Direct Loan program.

What is curious in the current student loan credit market debate is why some in Congress first turned to state lenders of last resort to augment liquidity. The more recent focus on Direct Loans as the primary backup source of capital is a welcome development in my view. Greater use of Direct Loans as a source of capital could have the added benefit of helping to address a very real problems in student loans -- the large and growing number of borrowers who have trouble repaying their loans.

When the Congressional Democrats first came back into power last year, they cut interest rates for new borrowers who already qualify for federal payment of interest while they remain in school. But that left out the millions of existing borrowers who are having trouble repaying their loans. Having the government buy up existing FFEL loans now would greatly increase the number of borrowers who would benefit from income contingent repayment and loan consolidation provisions. A greater policy focus on what happens when students enter repayment rather than when they initially borrow would be a welcome change in the student loan debate.

The most troubling proposal now being debated, however, is one that would greatly increase the amount that students could borrow in the federal student loan programs. These changes in loan limits are surely well intentioned, aimed at letting students shift from risky and expensive private loans to cheaper and guaranteed federal student loans.

But the proposed increases in loan limits have the potential of taking a problem created by the market and shifting it to the federal government. These increases in loan limits represent a bailout of many proprietary schools, some private colleges, and a number of lenders who have come to rely on private student loans to skirt the limits in the federal student loan programs. Particularly troubling is the increase in loan limits for independent students that would grow to an astounding $57,000 cumulatively under the House Committee bill as it could be an invitation for a renewal of large-scale defaults in the federal student loan program.

There are better ways to help those students who now borrow private student loans. All entail greater risk sharing by lenders and institutions.

Lenders should have to absorb a higher share of default costs in the federal student loan programs;
Institutions should be required to pay a portion of each loan on which their students default;
Institutions should be required to offer discounts to student borrowers so that the federal government is no longer put in the position of guaranteeing and subsidizing loans geared to the full sticker price, which fewer and fewer students actually pay; and
Any increase in federal loan limits should be much more modest with no difference for whether students are dependent on their parents or financially independent -- students should be able to borrow a standard amount for living expenses whatever their circumstances.

In sum, the (remote) possibility of a federal student loan credit crunch should not be used to justify a raid on the Treasury in the form of large increases in federal student loan limits. Instead, the federal government should be ready to rely on Direct Loans to provide liquidity and expand income contingent options for borrowers having trouble making their repayments. Greater cost sharing for defaults should be instituted for lenders and institutions, and institutions also should be required to step up to the plate and offer sizable discounts to reduce how much students must borrow to attend their institution.

The latest, perceived student loan crisis should be used to help borrowers in trouble, not bail out lenders and schools that have come to rely on private loans.

Art Hauptman is an independent consultant on higher education finance issues. The views expressed herein are his own and do not necessarily reflect the positions of the New America Foundation.

Higher Ed Roundup: Week of April 14 - April 18

Ed Policy — Fri, 18 Apr 2008 17:56:00 -0400

House Passes Bill to Ease Credit Crunch Impact on Student Loans, Others in the Works

No Crisis Here, Says American Council on Education

Dems Introduce Legislation to Allow Private College TA Unions

House Passes Bill to Ease Credit Crunch Impact on Student Loans, Others in the Works

The U.S. House of Representatives overwhelmingly approved legislation on Thursday designed to increase federal loan options for students and ease the effects of the credit crunch for lenders that participate in the Federal Family Education Loan (FFEL) program. The bill, which passed by a vote of 383 to 27, would increase the annual and aggregate federal unsubsidized Stafford loan limits, allow parents to defer payments on PLUS loans while their children are in school, and establish the Department of Education as a "secondary lender of last resort" with the power to purchase outstanding FFEL loans and service them through the Direct Loan program. The House also approved several amendments to the bill, including one that would require the Government Accountability Office to conduct a study to determine whether the loan limit increase causes colleges to raise their prices. The study would also look into whether increase the limit on federal loans has the desired effect of leading colleges to reduce their students' use of high cost private loans.

In a Statement of Administration Policy, the White House expressed general support for the legislation, but shared concerns with for-profit colleges that increasing federal loan limits may push the trade schools' dependence on federal funds beyond the 90 percent limit required in order to participate in the federal student-aid program.

Meanwhile last week, Sen. John Kerry (D-MA) introduced legislation to use the Federal Home Loan Bank System to boost liquidity in the student loan market. The Emergency Student Loan Liquidity Market Act, is a companion bill to legislation that was introduced two days earlier in the House by Rep. Paul Kanjorski (D-PA). It would allow the Federal Home Loan Banks to use surplus funds to invest in student loans, use student loans and related securities as collateral, and advance funds to member banks to originate student loans.

No Crisis Here, Says American Council on Education

There may be cries of panic from some in Congress and the student loan industry, but the one of the leading lobby groups for higher education reports no evidence of a "student loan crisis." Terry Hartle, senior vice president of the American Council on Education (ACE), reported to the Senate Committee on Health, Education, Labor and Pensions on Thursday that the organization has not heard complaints so far. He added that the group will continue monitoring the situation. The council briefed staff working for the Senate panel's chairman, Sen. Edward Kennedy (D-MA), two days after the Senator sent a letter to the ACE, urging its member institutions to sign up for the Direct Loan Program, even if they have no intention of using it. [Disclosure: the Editor of Higher Ed Watch used to work for Kennedy.]

Meanwhile, the Department of Education is planning its own assessment of student loan availability, as part of its efforts to monitor the situation. A proposed emergency survey of all FFEL colleges, will ask schools if they have secured lenders for the 2008-09 academic year and requests a list of these lenders.

Dems Introduce Legislation to Allow Private College TA Unions

Teaching assistants at private colleges and universities would be granted the same right to unionize and engage in collective bargaining as their peers at public schools under a bill introduced Thursday. Sen. Edward Kennedy (D-MA) and Rep. George Miller (D-CA) dropped companion versions of legislation that would overturn a 2004 ruling by the National Labor Relations Board (NLRB) holding that private college teaching assistants are primarily students, not employees, and thus do not have the right to unionize. Public colleges are not affected by the same ruling, because teaching assistant unions there are covered by state laws. [Disclosure: the Editor of Higher Ed Watch worked for Kennedy.]

Where's the Bail Out for Borrowers?

Ed Policy — Thu, 17 Apr 2008 22:39:00 -0400

After Tuesday's surprisingly one-sided hearing before the Senate Banking Committee on the credit crunch, it's clear that Congress is prepared to take steps to add liquidity to the student loan marketplace. But as lawmakers move forward with plans to bailout student loan giants like Sallie Mae, they shouldn't forget about the financially-distressed borrowers who have been victimized by the lenders' predatory private loan practices. Surely, they deserve a helping hand too.

Over the last two years, we at Higher Ed Watch have written extensively about how loan companies' aggressive marketing practices and cozy relationships with colleges have pushed students to take on unnecessarily high levels of expensive private student-loan debt, often before they have exhausted their lower-cost federal loan eligibility. In fact, at least one in five private student loan borrowers take out a private loan before they exhaust safer, cheaper federal Stafford loan options.

Lenders will deny responsibility until they're blue in the face, but they're the ones who have been feverishly marketing $30,000, $40,000, or $50,000 a year direct-to-consumer private loans to undergraduates. In pop-up Internet advertisements, youtube videos, and television and radio commercials, the companies tout the convenience of applying for private loans but seem to brush by the fact private loans are more expensive than federal loans and lack important safeguards.

Lobbyists for colleges and financial aid administrators place the blame squarely on direct-to-consumer marketers. But many private colleges and high-priced public universities are also putting students in harm's way by including private loans in the financial aid packages they offer students. Packaging private loans gives students the misleading impression that they have no choice but to take out these loans. It also leaves them with the impression that these loans have the colleges' imprimatur and therefore must have pretty reasonable terms, which they seldom do. Worse, some lenders have encouraged colleges to brand the loans with their institutions' names -- which only adds to the confusion.

Perhaps the students who have been hurt the worst have been the low-income and working-class students who were pushed to take out subprime private loans, with rates and fees totaling more than 20 percent, to attend poor-performing trade schools owned by giant for-profit higher education chains like Career Education Corporation and Corinthian Colleges. By all accounts, defaults on these loans are growing alarmingly. And serious questions have been raised about whether these companies have duped disadvantaged students into taking on private loan debt without making them aware of their cheaper loan options first.

Now don't get us wrong. Congress is preparing to take steps that will make private loan borrowing somewhat safer for future students. Lawmakers are finalizing legislation to renew the Higher Education Act that would, for example, ban lenders from co-branding private loan products with a college’s name or logo. The legislation also includes provisions that aim to discourage lenders from making subprime private loans and that would make it easier for colleges to counsel students against taking on private loans prior to exhausting their federal student loan eligibility.

These provisions are all good, but they won't provide any relief to borrowers who have already fallen victim to lenders' predatory private student loan practices. The House had a chance to start to make things right for these students in February but punted. Under pressure from the loan industry, the House defeated a measure that would have allowed borrowers in severe financial distress to discharge their private loans in bankruptcy.

But now that Congress is considering bailing out lenders for past risky financing decisions, we believe that lawmakers have an even stronger obligation to revisit the bankruptcy issue. Private student loans should not be treated any differently from other forms of consumer debt when it comes to bankruptcy. Folks who borrow private students loans are trying to better their lives. They certainly shouldn't be treated more harshly than those who rack up credit card debt at the mall.

We also believe that policy makers need to consider efforts to help borrowers who took on private loan debt before exhausting their federal student loan eligibility. They can do this by authorizing the Department of Education to offer a debt swap to these borrowers. Under this proposal, which we floated last month, the federal government could make new unsubsidized federal Stafford loans available for all borrowers (out-of-school or in-school) with private loan debt and untapped federal loan eligibility. These newly borrowed funds would have to be used to pay off existing private student loan debt. Presumably, a debt swap policy would ease the financial burden of private loan borrowers and infuse liquidity into the private student loan market.

These proposals -- for revising the bankruptcy law and authorizing a debt swap -- are reasonable steps that Congress can take to help out private loan borrowers in dire straits. Borrowers with unmanageable debt loads may not be able to hire high-priced lobbyists or lavish lawmakers with generous PAC contributions, but that doesn't mean that they should be left out of the discussions. Because really, if we're talking about a bailout, who's more deserving?

This post was prepared by Stephen Burd and Michael Dannenberg.

Helicopter School's Crash Leaves Students Grounded

Stephen Burd — Wed, 16 Apr 2008 14:45:00 -0400

If you want to know the dangers of taking out private student loans, just ask the 2,500 students who were, until early this year, enrolled at flight academies across the country owned by Silver State Helicopters.

As recounted by The San Diego Union-Tribune, these students were "left in the lurch" when the Nevada-based company, without warning, shut its doors on Super Bowl Sunday and filed for bankruptcy liquidation. Because the schools did not have the proper accreditation to qualify to participate in the federal student aid programs, the company directed students to take out high-cost private student loans to cover the $70,000 tuition that they were required to pay up front. Unfortunately, these students may be stuck repaying these loans for training they did not ultimately receive.

At Higher Ed Watch, we have often warned of the hazards of private loans, particularly for students attending questionable for-profit trade schools. Private loans almost always have worse terms than federal loans, and lack important safeguards. Unlike federal loans, for example, private loans are not automatically discharged if a borrower attends a school that unexpectedly shuts down before a student completes his or her studies.

To make matters worse, the federal government has made it extremely difficult for borrowers in financial distress to discharge private loans in bankruptcy. While the law does allow discharge for borrowers who can prove that repaying the loans would cause "undue financial hardship," courts have applied the undue hardship standard unevenly, leaving many desperate private loan borrowers with no way out.

All of which is to say that while the unscrupulous owners of Silver State Helicopters can liquidate their company and escape their debts through bankruptcy, flight-academy students like Hector Leon, a divorced father of two who first enrolled in the school in 2006, have no such recourse.

Like many such students, Leon was taken in by the dreams the school was selling. "When I heard their ads, which said you could make upwards of $150,000 to $180,000 a year, I thought it was the way to get a better income and provide a better life for my two kids," Leon told the Union-Tribune.

Sadly, Leon's story, and that of his classmates, is all too familiar.

In the late 1980's and the early 1990's, the U.S. Education Department and Congress were forced to take emergency actions to crack down on an explosion of fly-by-night trade schools set up solely for the purpose of reaping profits from the federal student aid programs. As a result of the crack down, hundreds, and even thousands, of disreputable proprietary institutions were forced to close or were shut down.

Since that time, advocates for trade schools have lobbied aggressively to get federal policy makers to relax these rules, arguing that the problems of the past are entirely behind them. But over the last several years, some of the largest publicly-traded for-profit higher education companies -- such as the University of Phoenix, Career Education Corporation, and Corinthian Colleges -- have come under intense scrutiny from federal and state regulators and have faced numerous lawsuits over allegations that they have engaged in aggressive and misleading recruiting and admissions tactics to inflate their enrollment numbers, while providing academic offerings of dubious value.

And in recent years, there has been a proliferation of unlicensed and unaccredited (or at least not accredited by groups recognized by the U.S. Education Secretary) trade schools, like the Silver State Helicopters Flight Academy, that do not participate in the federal student aid programs and therefore go largely unregulated. The growth of these schools appears to have been fueled by student loan companies that have willingly and irresponsibly "partnered" with the institutions to provide high-cost private loans to the at-risk students these schools tend to attract.

If Congress doesn't overreach in lubricating student loan liquidity, one of the credit crunch's potential silver linings is that it may discourage lenders from participating in deals with the likes of $70,000 a year, unaccredited helicopter training schools. That would benefit both students and the public.

Higher Ed Roundup: Week of April 7 - April 11

Ed Policy — Thu, 10 Apr 2008 19:41:00 -0400

Student Aid Bill Approved by House Committee

Fed Chairman Rebuffs Calls from Pro-FFEL Lawmakers for Lender Bail Out

Settlement Doesn't Stop Sallie's Online Presence, Chronicle Investigation Finds

Student Aid Bill Approved by House Committee

The House of Representatives Committee on Education and Labor unanimously approved a bill on Wednesday designed to increase federal loan options for students and ease the effects of the credit crunch for lenders that participate in the Federal Family Education Loan (FFEL) program. The bill, which is similar to legislation introduced last week by Sen. Edward Kennedy (D-MA), would increase annual Stafford loan limits by $2,000 a year for undergraduates (bringing the aggregate totals to $31,000 for dependent students, and $57,500 for independent students); allow parents to defer payment of PLUS loans while their children are in school; and maintain eligibility for parents to PLUS loans even if they are delinquent on their mortgages. The bill also would allow the U.S. Department of Education to serve as "a secondary lender of last resort" to help provide liquidity to lenders that need new sources of capital to stay in business. Under the plan, the department would purchase outstanding FFEL loans from struggling lenders and service them through its Direct Loan program.

While many praised the legislation, the nation's leading student advocacy groups have questioned a provision in the bill that would allow the Education Department to designate student loan guarantee agencies as the "lender of last resort" for entire colleges rather than for individual students, as is the currently the case. In a letter to Congress, the groups expressed concern that the provision would open the guaranteed loan program up to abuse by guarantors eager to expand their business and win greater federal subsidies, and schools that are eager to maintain the sweetheart deals the have had with lenders. The advocates called on lawmakers to alter the provision to prevent guarantee agencies from marketing "lender of last resort" loans, and require colleges to prove their students are unable to obtain FFEL loans without the designation.

Fed Chairman Rebuffs Calls from Pro-FFEL Lawmakers for Lender Bail Out

Late last week, Federal Reserve Chairman Ben Bernanke rejected calls from Rep. Paul Kanjorski (D-PA) and 31 other lawmakers to use the Fed to inject liquidity into the student loan market. In a letter to Kanjorski, Bernanke said that while he shared their "concerns about the difficulties in the student loan market," the problems some lenders are facing do not rise to the level required for Fed action. "The Federal Reserve," he wrote, "has extended credit to primary deals in recent weeks only after it reached a judgment that a failure to lend could well prompt a systemic crisis in the financial system that could threaten the health of the overall economy." Undaunted, Kanjorski, who has long been a strong FFEL advocate, introduced a bill this week that would authorize the Federal Home Loan Banks to use surplus funds to invest in student loan securities, accept student loans and related securities as collateral, and provide secured advances to members so that they can originate student loans. The bill's prospects are unclear.

**Settlement Doesn't Stop Sallie's Online Presence, Chronicle Investigation Finds**

An investigation by The Chronicle of Higher Education revealed this week that student loan giant Sallie Mae is continuing to act "as host to the entire online presence for the financial-aid offices" at three minority-serving colleges, despite the spirit of a settlement agreement it reached a year ago with New York Attorney General Andrew Cuomo. Under that settlement, Sallie Mae agreed to pay a $2 million fine and stop partnering with colleges to provide financial aid services to students. Despite that deal, the Chronicle found that Bennett College for Women, Bethune-Cookman University, and Wiley College were all continuing to use the company's Campus Gateway software - a web-design tool that lets colleges "organize and present products for every phase of the college experience," according to Sallie Mae's Web site. None of the schools' sites contain a warning about the lender affiliation, and the top loan choice available at Bennett is a private Sallie Mae loan. Not surprisingly, Sallie Mae held the vast majority of federal loan volume at the two schools that provided minimum additional lender options.