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
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.
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.
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
At Higher Ed Watch, we have focused recently on deals that chains of publicly-traded, for-profit trade schools have made with loan providers like Sallie Mae that have allowed them to push low- and moderate-income students to take out high cost, subprime private loans. But for-profit colleges are not the only higher-education institutions that have forged these kinds of arrangements and put students in harm's way. Many expensive non-profit private colleges have come to rely on these arrangements as essential tools in carrying out their enrollment management plans.
And now with the credit crunch, as well as a federal crackdown on sweetheart deals between lenders and colleges, many private college leaders are anxious that the easy access they've had to the private loan market is starting to dry up.
That much is clear from the results of a recent survey conducted by he National Association of Independent Colleges and Universities (NAICU), which lobbies on behalf of private nonprofit colleges, to determine the effect that the credit crunch is having at its member institutions. Despite some alarmist rhetoric in the news release accompanying the report "about reductions in student loan availability," the survey confirms what we've been saying -- that there is absolutely no federal student loan crisis. Of the 315 private colleges that responded to the survey, not a single school reported having any trouble obtaining federal loans for their students.
According to recent reports, some lenders are pulling out of the Federal Family Education Loan (FFEL program due to malfunctioning credit markets - and, some loan industry officials say, due to cuts in federal subsidies. The authors of these reports appear to believe that fewer lenders is bad news. But is it necessarily bad to have fewer lenders participate in the FFEL program and better to have more? Are there too many now or too few?
These questions expose FFEL’s fundamental policy flaw. An auction system, like the one Congress enacted for PLUS loans set to begin in 2009, provides the remedy.
FFEL Can’t Get it Right
The FFEL program's fundamental policy flaw is that it is not designed to ensure that an optimal number of lenders (or any lenders at all) participate in the program at a reasonable price for taxpayers. The result is a continuous debate about how much lenders should be subsidized to ensure that "enough" lenders participate in the program.
More lenders in the program ensures a well capitalized program and greater competition for school and student business, fostering better customer service. On the other hand, more lenders in the FFEL program requires higher subsidies and costs taxpayers more money, making fewer dollars available for say, student grants or other priorities. Unfortunately, Congress, the media and student loan lobbyists never confront these tradeoffs head on. A framework is therefore needed that forces policymakers to be explicit about the tradeoffs. The PLUS auction provides that framework.
Democrats Introduce Bills Aimed At Easing Student Loan Credit Crunch
Students at Canadian Career Colleges Have More Loans, More Defaults
Dept. of Ed Issues Guidelines on Lender-of-Last Resort
In trying to raise panic over the student loan crunch, much of the student loan industry has had a not so hidden agenda: to get Congress to revisit lender subsidy cuts it made last fall.
Beware of Propaganda
The goal of reversing subsidy cuts became especially clear last week when Higher Education Washington Inc. (HEWI), a publication owned and operated by a top student loan industry lobbyist, published an article claiming there were "increasing signs that at least some in Congress will attempt to revisit the College Cost Reduction Act -- specifically, the elimination of $18 billion in subsidies to private lenders."
The article's proof for this claim: statements in favor of restoring the subsidies made by Rep. Howard "Buck" McKeon (R-CA) and Sen. Ben Nelson (D-NE). There's just one problem. McKeon and Nelson, both strong supporters of the loan industry, have never wavered in their opposition to recently enacted lender subsidy cuts.
In fact, Nelson, who has strong ties to the Nebraska-based loan company Nelnet, unsuccessfully tried to get the Senate to scale back the size of the subsidy cuts last summer when the College Cost Reduction Act first came up for a vote in that chamber. (He lost 61-36.) Now, in a statement he issued this month, he laid the blame for the loan industry's current troubles at least in part on his Senate colleagues for having defeated his amendment:
Last week, we wrote that Sallie Mae and its promoters on Wall Street claim the company was "blind-sided" by the rising default and delinquency rates on subprime private loans it made to low-income and working class students at poor performing higher education trade schools. It's a convenient argument considering that the loan giant is facing at least one, and possibly several, class action lawsuits by angry shareholders who accuse the company of deliberately misleading them about the amount of risk it was assuming. But the argument is disingenuous at best.
Financial analysts have long raised red flags about Sallie Mae's private lending practices. During earnings calls and at shareholder meetings and investment conferences, analysts regularly peppered Sallie Mae officials with questions about whether the company, which is used to having government backing on its loans, had the expertise needed to assess the risks associated with lending unsecured, private loan debt to financially-needy students.
Of particular concern to these analysts have been the sweetheart deals that Sallie Mae forged with some of the most scandal-ridden chains of for-profit colleges, such as Career Education Corporation and Corinthian Colleges. Under these Orwellian-sounding "opportunity pool" or "recourse loan" arrangements, Sallie Mae agreed to provide funds for private student loans, with interest rates and fees totaling more than 20 percent per year, to financially-needy students who normally wouldn't qualify for them because of their subprime credit scores. Sallie Mae apparently viewed these loans as "loss leaders," meaning that the company was willing to make these loans, many of which were likely to go into default, in exchange for becoming the exclusive provider of federal and private loans for the tens of thousands of subprime and non-subprime students these huge chains serve.
Students at Trade Schools Most Likely to Borrow, New Study Shows
Changes Ahead in Future Applicant Pool
Ed Dept. Officials Reassure Students of Loan Availability