College Access

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.

By Art Hauptman

There is widespread agreement among financial aid analysts and practitioners that our country's student aid system is not working as effectively as it could be. Many believe that the solution to this problem is to have the federal government substantially increase the amount of money it spends on the existing student aid programs.

I disagree. The federal government currently spends roughly $40 billion for grants, college work study, loan subsidies, and tax breaks for college -- more than enough to achieve the programs' goals if they were operating effectively and efficiently. As I argued last week, the current structure of student financial support in this country needs to be changed in fundamental ways.

White House, Fed Move on Student Loans

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Coalition Offers Help to Schools Considering Switch to Direct Lending

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

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.

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

Falling state support for higher education has a number of onerous effects: increased tuition and fees, more student debt, and a greater likelihood of scaring away low-income students. Less examined is that lost state revenue has driven many public universities and state colleges to find new and previously untapped funding sources - even ones that have dangerous repercussions for their students.

Despite nearly a half decade of solid economic growth, aggregate state support of higher education funding has fallen by 7.8 percent over the past five years in real terms. But the average obscures the wide variability among states. For example, in states such as Alabama, Hawaii, and Wyoming, appropriations per full-time student increased by at least 20 percent. The flipside, of course, is that states such as Colorado, Minnesota, and Vermont all have seen their appropriations decrease by 25 percent or more.

Public colleges typically react to funding cuts by hiking tuition. This certainly has occurred - overall tuition revenue per student at state colleges has risen 24 percent over the past half decade, according to a recent report by the State Higher Education Executive Officers.

Student Aid Bill Approved by House Committee

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

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