Non-Profit Lenders

Weekly Roundup: February 25 - February 29

Ed Policy — Fri, 29 Feb 2008 21:22:00 -0500

PHEAA Temporarily Suspends Federal Student Loans

Spellings Takes the Heat for President Bush's Education Budget Request

Public Colleges and Universities Pinched by State Budget Shortfalls

Brown University Increases Financial Aid

PHEAA Temporarily Suspends Federal Student Loans

The Pennsylvania Higher Education Assistance Agency (PHEAA) announced on Wednesday that it will temporarily stop providing federal loans through the Federal Family Education Loan Program (FFELP), blaming increased turmoil in the capital markets. PHEEA stopped making out-of-state loans two weeks ago.

PHEAA executives stressed that the move will have a minimal impact on students, since other lenders, especially commercial banks, are in a position to pick up the loans. The 2.7 million students and parents who already have loans will not be affected. PHEAA will continue to guarantee and service FFELP loans.

These reassurances were intended to calm a panic about loan availability that , incidentally, PHEAA has helped promote. Just last week, PHEAA convened an emergency student loan funding summit at which PHEAA chairman William Adolph, in an effort to secure federal support for lenders, warned that "millions of college students may now face foreclosure on their plans for a higher education." We are grateful that Adolph is sounding a more responsible note now.

Spellings Takes the Heat for President Bush's Education Budget Request

Education Secretary Margaret Spellings came under fire from members of both political parties on Tuesday when she appeared before the House Appropriations subcommittee that sets the Department of Education's budget. In her opening statement, Spellings touted President Bush's request to increase spending on Pell Grants by $2.6-billion in order to raise the maximum grant to $4,800 in the2009 fiscal year. Lawmakers, however, complained that the Administration was robbing Peter to pay Paul, by proposing to eliminate other federal student aid programs, including Supplemental Educational Opportunity Grants and Perkins Loans, to finance the Pell Grant increase. They also complained about proposed reductions in spending on historically-black colleges and universities and other minority-serving institutions. The budget request "doesn't reflect the committee's values," Rep. Tim Ryan (D-OH) told Secretary Spellings.

Public Colleges and Universities Pinched by State Budget Shortfalls

The slowing American economy has prompted several state legislatures and governors to propose cutting higher education spending for the next school year. The Florida public university system, for example, has instituted a hiring freeze, is turning away more applicants, and is considering an 8 percent tuition hike. Public colleges in New Jersey, meanwhile, are bracing themselves for a 4 percent decrease in their state funding, though this is a less severe reduction than many had predicted. In Rhode Island, Gov. Don Carcieri has asked colleges to give back $3.7 million this spring and anticipates a $17.8 million cut next year.

At the same time, data released this week by the State Higher Education Executive Officers (SHEEO) shows that state funding per-pupil increased in 2007, to an average of $6,771, but that is down from an all-time high of $7,621 in 2001. The SHEEO reports that colleges are increasingly relying on tuition for revenue.

Brown University Increases Financial Aid

Brown University became the latest elite institution to join the affordability race, announcing this week that it will eliminate tuition for students from families that make less than $60,000 a year and replace loans with grants for students from families with incomes of $100,000 or less. The university will, however, introduce work-study for first-year students, ending a long-standing "no-work" rule for freshmen. The move represents a 20 percent increase in Brown’s financial aid budget to more than $68 million and an increase in the school’s endowment payout rate for financial aid from 5.5 to 5.89 percent.

Concern Over Lender Subsidies or Borrower Benefits, Which Is It?

Jason Delisle — Tue, 26 Feb 2008 14:00:00 -0500

Last year when Congress cut subsidies to lenders making federally backed student loans, critics argued that the cut would hurt borrowers. They argued that lenders would reduce voluntarily provided "borrower benefits," because the subsidy cuts would make providing them unaffordable. The argument continues to appear in the press, and certain Members of Congress lamented borrower benefits again during consideration of the Higher Education Act reauthorization earlier this month.

[slideshow] At first glance, the concern over borrower benefits seems legitimate. Congress' decision to cut taxpayer supplied subsidies to student loan providers led some lenders to cut voluntarily provided borrower benefits. But upon closer examination, the concern, especially as expressed by lawmakers, appears dubious. Borrower benefit supporters in Congress are either confused about the workings of the federal student loan program or they are shaking down taxpayers to over-subsidize banks.

Simply consider the fact Congress can provide any level of borrower benefits it chooses while subsidizing lenders at their current rate. This is possible because student benefits and lender subsidies are set separately under the existing federal student loan program structure. Congress does not need to increase taxpayer subsidies to lenders to increase student benefits, and it can take action to ensure any borrower benefits are provided when lender subsidies are cut.

Lender Subsidies and Borrower Benefits are Separate

Lenders making federal student loans are entitled to two main subsidies. They receive a guaranteed interest rate on a federal loan issued and a guarantee against all but a small fraction of loses in cases of default. Specifically, the interest rate subsidy is structured so that a lender holding a federal student loan receives each financial quarter an interest rate equal to a short term market interest rate (91 day commercial paper) plus 2.3 percentage points (1.8 percentage points on loans made after July , 2008). Lenders can receive no more and no less.

Borrowers, on the other hand, pay a fixed interest rate of 6.8 percent for the life of the loan. The borrower makes loan payments to the lender, but if the payments are not enough to cover the lender’s guaranteed interest rate each financial quarter, the federal government pays the lender to fill in the gap. Conversely, if the borrower’s payments are more than enough to cover the guaranteed rate of return to the lender, then the lender remits the excess portion of borrower payments to the federal government.

Aside from the 6.8 percent fixed interest rate, borrowers are also guaranteed other benefits under federal law, such as income based repayment plans and generous deferment terms. No lender can deny the standard loan benefits to any student borrower.

But lenders typically have provided voluntary benefits beyond those required under law, such as lower interest rates for on-time repayment or reduced origination fees. Lenders have done so to win business from schools and students, and because the federal subsidy structure to the lenders as described above has proved more than sufficient to cover lenders’ costs for providing the standard borrower terms.

So You Want Borrower Benefits? Then Make Them Mandatory.

Critics of the lender subsidy cuts included in the College Cost Reduction and Access Act of 2007 – the cut in the quarterly interest rate guarantee from 2.3 to 1.8 percentage points over commercial paper rates – argue that the new subsidy rate will not be sufficient to induce lenders to provide benefits beyond those guaranteed to borrowers under law. Implicit in the argument is that Congress needs to subsidize lenders at higher levels to encourage them to pass along some of that subsidy to borrowers.

But if borrower benefit reductions are of such concern to Members of Congress, why not just provide them directly to the borrower using the money that would have gone to support a higher lender subsidy? Cut out the middleman. Congress could write in statute any of the benefits typically provided voluntarily by lenders, just as it does for all other loan terms. These might include an interest rate reduction for borrowers who make on-time repayments or the waiver of origination fees collected by the Department of Education. Lenders, of course, would be held harmless because of the structure of the loan program. They receive the same taxpayer subsidized, guaranteed rate of return regardless of the borrower benefits, no more and no less. The guarantee against default would be unchanged as well.

Yes, a new benefit costs taxpayers more. In the case of an interest rate reduction for on-time repayment, the government would have to spend more to fill in the gap between the lender’s guaranteed rate of return and the lower borrower interest rate. But the key point is that the lender would still receive the same guaranteed interest rate of return on a loan regardless of the government set borrower interest rate.

Members of Congress who claim to be borrower benefit supporters should not be troubled by the higher federal costs of providing benefits to borrowers directly instead of through middlemen lenders. After all, these same Members of Congress support higher taxpayer subsidies to lenders in the name of borrower benefits, which also translate to higher costs for taxpayers.

So why has no Member of Congress who is a proclaimed supporter of borrower benefits offered to provide them as a standard for all federal student loans?

Perhaps they misunderstand how the student loan program is structured. Or, perhaps they are really in favor of bigger bank subsidies, not better borrower benefits.

Roundup: Week of February 11 - February 15

Ed Policy — Fri, 15 Feb 2008 00:00:00 -0500

Michigan Non-Profit Lender Pulling Out of Private-Loan Market

Lawsuit takes aim at study-abroad "home – fees"

More Students Pass AP Exams, but Achievement Gaps are Widening

Michigan Non-Profit Lender Pulling Out of Private-Loan Market

Because of concerns about available capital, the Michigan Higher Education Student Loan Authority announced this week that it would temporarily stop issuing private student loans. Citing, "current and unprecedented capital-markets disruption," the non-profit lender said in a statement on its Web site that it would stop disbursing funds for its private Michigan Alternative Student Loan (or MI-Loan) program, which is used at more than 100 Michigan colleges. The announcement came a day after reports emerged that other companies were having trouble auctioning off their existing private student loans as asset-backed securities to obtain financing to make new loans. Some loan industry officials and their allies in Congress have seized upon the credit turmoil to suggest that Congress went too far last year when it cut taxpayer subsidies to lenders that participate in the Federal Family Education Loan (FFEL) program. In fact, the problems have been almost entirely in the private student loan marketplace, and federal Stafford loans remain universally available to students.

Lawsuit takes aim at study-abroad "home – fees"

While study abroad programs have drawn attention in recent months for alleged conflicts of interest, one parent of a former student is charging that an increasingly common fee structure is "unlawful and deceptive. " James Brady, the father of a recent Wheaton College graduate filed a lawsuit last Friday against his daughter’s alma mater. In the suit, Brady challenges the Massachusetts school’s use of a "home-fee" tuition policy — in which it charges the full price of a semester at Wheaton even if the student is attending a cheaper Wheaton-sponsored study abroad program. Brady claims that this practice resulted in his daughter paying an extra $4,439 to Wheaton above the $17,000 price tag of her study-abroad program in South Africa. The use of blanket "home-fee" policies has proliferated over the past few years, as schools use the higher payments at least in part to help provide low-income students with institutional financial aid so they aren't closed off from participating in these programs.

More Students Pass AP Exams, but Achievement Gaps are Widening

More students are passing Advanced Placement exams, but participation and achievement gaps still persist between white and minority students, according to data released this week by the College Board. The number of students passing at least one AP test increased from 11.7 percent of all high school graduates in 2002 to more than 15 percent for the high school class of 2007. At the same time, minority students are signing up for the courses at a rate slower than their white peers. Black students represent about 14 percent of the high school population, yet comprised only 7.4 of those enrolled in AP courses. Hispanic students were better represented, making up 14 percent of AP enrollees versus 14.6 percent of all high school students. However, their participation in courses other than AP Spanish was just 7.5 percent. In terms of achievement, only about 3 percent of the students who received a passing score of 3 or higher on at least one exam were black. Comparatively, about 66 percent of those students were white.

Roundup: Week of February 4 - February 8

Ed Policy — Fri, 08 Feb 2008 00:00:00 -0500

House Approves Bill to Reauthorize Higher Education Act

[slideshow]In an overwhelming 354 to 58 vote, the House approved legislation on Thursday that would reauthorize the Higher Education Act for the next five years. The College Opportunity and Affordability Act (H.R. 4137) would impose new restrictions on the relationships between student loan providers and colleges, increase transparency in the private student loan market, simplify the process of applying for financial aid, keep textbook costs down, increase aid for veterans and military families, and tackle rising tuition costs. The legislation would also significantly weaken a provision in the law that protects students from unscrupulous for-profit trade schools.

More than two dozen amendments were included in the legislation, among them a requirement that colleges report how much of their endowment is spent on reducing tuition costs. The House also passed a measure, sponsored by Reps. Patrick Murphy (D-PA) and Sue Myrick (R-NC) that would require colleges to provide prospective students with an estimate of how much they will be expected to pay in tuition and fees before they earn their degrees. The chamber, however, rejected an amendment, favored by the New America Foundation, that would have made private student loans dischargeable in bankruptcy.

White House Voices Opposition to HEA

While the Higher Education Act moved a step closer to its first reauthorization in a decade, the Bush administration issued a statement of administration policy on Wednesday saying that the president "strongly opposes" the House version of the bill. The administration’s main complaint was that the legislation allows colleges to set their own standards of quality for accreditation purposes — significantly weakening the already minimal authority of regional accreditors. In addition, the administration complained about the inclusion of four dozen "costly" and "duplicative" programs, and of a provision that rewards colleges that hold down their prices with extra federal grant aid. Despite these complaints, however, the president did issue a veto threat against the bill.

Ed Dept. to Allow 7 Lenders to Keep Receiving 9.5% Loan Payments

A little over a year after it halted payments on 9.5 percent loans, the Department of Education announced this week that it will provide subsidy payments at that level to seven lenders. The lenders — which include nonprofit lenders from states such as Mississippi, Texas, Montana, and Vermont — were chosen from a group of 15 that had agreed to an audit to prove they legitimately qualified for payments that guarantee a 9.5 percent return on student loans. The need for this scrutiny arose last year after an Inspector General’s report revealed that both student loan provider Nelnet and the Pennsylvania Higher Education Assistance Agency (PHEAA) overcharged the department by millions of dollars. Secretary of Education Margaret Spellings decided not to collect any of the estimated $278 million in overpayments by Nelnet and will receive no more than $15 million of the estimated $34 million that the department's own Inspector General concluded that Pheaa had overcharged. One notable applicant who failed to pass the Department audit is the New Mexico Educational Assistance Foundation, which was the first entity to be exposed for overcharging on its 9.5 loans.

NCAA Settles Antitrust Lawsuit

Thousands of student athletes will now be able to receive additional funds to cover college expenses, following the settlement of a multi-million dollar antitrust lawsuit against the NCAA last week. This ends a nearly 2-year-old lawsuit, White v. National Collegiate Athletic Association, brought by several Division I football and basketball players who claimed that the NCAA’s restriction that scholarships could only go toward tuition, books, housing and meals meant that they could not basic expenses such as health care and travel. Under the settlement, the NCAA will provide $218 million over six years to cover these additional expenses, with much of the money going toward the cost of tutoring and facilities. The high figure, however, is misleading — according to Inside Higher Ed, the NCAA will only provide $20 million in new funds, with only half that amount going to compensate students. Eligible parties, which include Division I football and men’s basketball players from 2002 to 2007, will be able to receive $500 to cover "career development" expenses and up to $2,500 a year for three years to cover additional education expenses.

Roundup: Week of January 28 - February 1

Ed Policy — Fri, 01 Feb 2008 00:00:00 -0500

PHEAA May Pay $15 Million For 9.5% Loan Payments

The Department of Education has asked the Pennsylvania Higher Education Assistance Agency (PHEAA), one of the country's largest nonprofit student loan providers, to repay as much as $15 million in federal payments it improperly obtained by exploiting a subsidy program that guaranteed loan providers a 9.5 percent rate of return on government-backed student loans. The request comes two months after an audit by the Department’s own Inspector General found that PHEAA had improperly obtained $34 million in subsidy payments. The Department rejected these findings and suggested the $15 million price tag but is ultimately letting PHEAA decide how much it has to repay. A PHEAA spokesman suggested to The New York Times that the lender may end up with "zero liability." PHEAA is the first party in the 9.5 scandal to be held financialy accountable for its actions. In 2006 another lender, Nelnet, was caught with $278 in improperly obtained Department funds. The Department asked for the money back, but then let Nelnet off without paying anything. In light of Nelnet’s free pass, Rep. George Miller, the California Democrat who is chairman of the House of Representatives Committee on Education and Labor, called the PHEAA request "a step in the right direction."

25 HBCUs Send Letter to House Ed Committee in Favor of Default Rate Change

The presidents and chancellors of 25 historically black public colleges and universities sent a letter on Tuesday to the leaders of the House Education and Labor Committee supporting a provision in a bill reauthorizing the Higher Education Act that would extend the window the federal government uses for measuring student loan defaults from two to three years. By sending the letter, which was also signed by the American Association of State Colleges, the leaders of these colleges sought to undercut arguments being put forward by for-profit college lobbyists -- who are vigorously opposing the amendment -- that historically black colleges would suffer if the provision is enacted. "This amendment will provide more meaningful and accurate information that will help institutions, lenders, and the Department of Education help students avoid student loan default," the black-college leaders wrote. "Default is avoidable, and we know that student borrowers usually default because they are not aware of all the student loan repayment options afforded to them under the law." The House is expected to take up its version of the Higher Education Act legislation next week.

Sallie Mae Settles

Sallie Mae has reached an agreement with its onetime buyers, ending a months-long legal battle and injecting some needed credit into the embattled lender. As a result of the settlement, Sallie Mae dropped a lawsuit it had filed against a consortium of potential buyers — including Bank of America, JP Morgan Chase and the private equity firm J. C. Flowers & Co. — after they backed out of the proposed $25 billion buyout deal in October. As part of the agreement, the consortium will refinance about $30 billion of Sallie Mae’s debt. The settlement is good news for the financially-troubled lender, which posted a $1.6 billion loss for the fourth quarter last year and recently announced it will cut back on its "subprime" student loans.

Asian Americans, Not Whites, Gain When Affirmative Action Axed

Asian-Americans, not whites, gain the most when affirmative action is eliminated from college admissions processes, according to a forthcoming study (summarized in the Chronicle of Higher Education, subscription required). Using enrollment data from 1990 to 2005 at the University of Florida, the University of Texas at Austin and the University of California campuses at Berkeley, Los Angeles, and San Diego, the study found that enrollment of blacks fell by up to 50 percent after the schools eliminated race as a factor in admissions decisions. Asian-Americans, the same data shows, filled four out of every five spots previously held by black students. For example, at UC-Berkeley, enrollment of Asian-Americans rose from 37 percent in 1995, the year before a ban on affirmative action went into effect, to 47 percent in 2005. The study will be published next week in InterActions: UCLA Journal of Education and Information Studies.

Too Little, But Not Too Late

Ed Policy — Tue, 15 Jan 2008 00:00:00 -0500

In approximately three weeks, the U.S. House of Representatives is expected to take up legislation that would impose new restrictions on the relationships between colleges and student loan companies. While the effort is to be applauded, the legislation could go much further in eliminating the types of "pay for play" conflicts of interest…

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.

Buried in Debt

Ed Policy — Tue, 11 Dec 2007 00:00:00 -0500

Over the last year, as we have investigated and reported on the "pay for play" student loan scandals, we have heard from some skeptical loan industry and college officials who question whether any students have actually been hurt by the unethical practices that have been revealed.

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.

Mailbag: Loan to Learn

Ed Policy — Thu, 06 Dec 2007 00:00:00 -0500

From the start of Higher Ed Watch in September 2006, we have focused a healthy amount of attention on the non-profit company EduCap, which until recently marketed private student loans under the brand name Loan to Learn. The company, which is owned by the Washington, DC socialite Catherine B. Reynolds, shut down…

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.

PHEAA's Gobble, Gobble

Ed Policy — Tue, 20 Nov 2007 00:00:00 -0500

In honor of the conclusion of the harvest season-and in order to give ourselves plenty of time for turkey, mashed potatoes, and pumpkin pie-Higher Ed Watch is taking the week off to celebrate Thanksgiving. But we'd be remiss not to also note the Pennsylvania Higher Education Assistance Authority's (PHEAA) turkey surprise.

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.

Roundup: Week of November 5 - November 9

Ed Policy — Fri, 09 Nov 2007 00:00:00 -0500

More Questionable Spending Uncovered at PHEAA

Gummy brains, brass clocks, and peppermint candies were among the promotional giveaways the Pennsylvania Higher Education Assistance Agency (PHEAA) spent $2.2 million on over a five-year period, the Patriot-News of…

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.