By Robert Shireman
Nearly a year ago, long before the current credit crunch, I spent some time reviewing the various methods of comparing prices on private student loans. I found that the "as low as" rates advertised on private student loan comparison sites don't tell the shopper very much. I also found that it is very difficult to get an actual private student loan rate quote for comparison purposes, because you have to complete entire applications, turn over personal details, and authorize credit checks. And those multiple credit checks from potential lenders can have the effect of hurting your credit score, because they create the impression that you are desperate to get a loan.
Nonetheless, I persevered and got some actual private student loan interest rate and fee quotes, and the promissory notes to go along with them.
“We have a responsibility to our students to help them obtain financial aid that allows them access to a
education,” Granier said. “Given the circumstances we believe that affiliating with the federally guaranteed Direct Student Loan Program will enable our students to continue their education without worrying about where their federal student loans will be coming from.” Penn State
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Good job, Secretary Spellings, in assuring college presidents through this letter that the current credit crunch will not negatively impact the availability of federal student loans. According to the Secretary, “federal financial aid -- grants, loans through both the Federal Family Education Loan (FFEL) and Direct Loan Programs, and work-study -- will continue to be available to your students and their families. There are more than 2,000 lenders that originate loans in the FFEL Program. While a few lenders have chosen or may choose to reevaluate their continued participation in this program, we expect other lenders will actively compete for this loan volume and ensure that a competitive, efficient, and comprehensive FFEL Program continues to provide a variety of lending options, foster innovation, and improve customer service.”
The Los Angeles Times recently provided a disturbing example of how some for-profit trade schools like Corinthian Colleges have been pushing subprime, high-risk students to assume heavy levels of debt that they may never be able to repay. In an article on the credit crunch, the LA Times quoted a 20 year old student, with a 10 month old baby, who is taking classes at Everest College in West Los Angeles to become a medical assistant. To pay for an eight week course at the Corinthian-owned school, this student has had to take out an $8,000 private loan with an 8 percent interest rate. The student, and several friends with similar loans, told the newspaper "that they knew that repayment would be difficult on the $9 an hour or so they expected to earn if they got jobs." The course, they said, gave them "75% to 90% of what they need to get and keep a job."
[slideshow] The students say the loans were worth taking because they gave them an opportunity to attend the school. But they probably won't be so happy when they go into repayment, particularly if those jobs don't materialize. They may be even more disappointed when they discover that they could have gotten the same training for a fraction of the cost at the nearby Pasadena City Colleges, which according to the LA Times, "charges $628 annually in tuition and fees to in-state residents."
If there is a silver lining to the credit crunch, it is that for-profit colleges and loan companies, like Sallie Mae, are being forced to think twice before pushing high-risk borrowers to take on expensive private loan debt that they have little hope of ever paying back.
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Late yesterday, two key Congressional leaders urged U.S. Education Department Secretary Margaret Spellings to ready long-standing "fail safe" systems that guarantee every student access to a federal Stafford loan no matter what occurs in the private credit markets. Sen. Edward M. Kennedy (D-MA) and Rep. George M. Miller (D-CA), the Chairmen of the Congressional education committees, urged Spellings to ramp up the Federal Family Education Loan (FFEL) program's "lender of last resort" plan and make known to colleges and universities their easy ability to enter the federal Direct Student Loan program.
The U.S. House of Representatives delivered a body blow to financially-distressed student-loan borrowers earlier this month when it voted down an amendment to a key higher education bill that would have allowed private student loans to be dischargeable in bankruptcy. Overall, the amendment, sponsored by Rep. Danny Davis (D-IL), failed by a vote of 179 to 236, with nine Republicans supporting the measure and 52 Democrats opposing it. But some very strange arguments were made.
In attacking the Davis amendment, Rep. Ric Keller of Florida, the ranking Republican on the House subcommittee on education, expressed sympathy for those who find themselves in dire straits and can't repay their loans. But then he argued that "the current system" offers them all the relief they need:
"Now what is a better way? The better way is the current system. You get out of school, you've got 10 years to make your payment, and if you can't make it, you work with the lenders for more flexible options, let you pay over 25 years. The Bankruptcy Code already provides a provision for undue hardship for those people who truly need it."
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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.