Credit Crunch

Higher Ed Roundup: Week of March 10 - March 14

Kennedy Offers Amendment to Increase Fed. Loan Limits

Lawsuit Alleges Online University Bilked Billions from Ed Dept.

Two Companies Announce End to Controversial Loan Programs

The Washington Post Gets the Story Wrong

At a time when an irrational panic appears to have swept over financial markets, everyone needs to act responsibly and make sure not to unnecessarily raise people's fears and promote bad public policy. The stakes are too high for opportunism or sensationalism. Unfortunately, when it comes to reporting the effect of the credit crunch on student loans, some in the media are being misled and unwittingly causing widespread panic that college loan funds are drying up. They're not.

Take, for example, The Washington Post's recent front page story, "Credit Crisis May Make College Loans More Costly: Some Firms Stop Lending to Students." The article begins with an ominous lede: "Many college students across the nation will begin to see higher costs for loans this spring, while others will be turned away by banks altogether as the credit crisis roiling the U.S. economy spreads into yet another sector." It wouldn't surprise us if some high school seniors in the DC metropolitan area, who are on the bubble about applying to college this year, read that front page lede and thought for at least a moment, "why bother?"

Answers to the Student Loan Credit Crunch

With any panic, there comes a point when cool heads have to stop saying “don’t worry” and start offering solutions to real and perceived phenomena. Unfortunately, we’ve reached that point when it comes to fears about the credit crunch and student loans. Today, we float some policy options.

To be clear, we at Higher Ed Watch continue to believe there is no federal student loan crisis. There is zero danger that federal Stafford loans will not be available to every student in the foreseeable future, regardless of their credit history or income. Even if 100 or more lenders close shop, there will continue to be over 2,000 federal student loan providers, including big banks, such as JP Morgan Chase, which recently hired ex-Nelnet workers and announced a voluntary reduction in federal student loan interest rates and fees.

In fact, this week the Consumer Bankers Association said that “despite a series of negative developments that have increased their costs and reduced their margins, banks plan to continue making both [federal] and private loans in academic year 2008-2009. Joe Belew, the association’s president, said that banks “have a decades-long commitment to the student loan business,” and even as some lenders pull out, “some banks plan to expand their lending in the upcoming academic year to ensure that students have the funds they need.”

BREAKING NEWS: Penn State Joins Direct Loan Program

Penn State University announced this afternoon that it will be joining the Department of Education's Direct Loan program as a way of ensuring its students maintain stable access to federal aid. The decision comes a little over two weeks after turmoil in the credit markets caused the Pennsylvania Higher Education Assistance Agency to temporarily suspend its federal loans and stop originating out-of-state loans. PHEAA served as the lender for 40,800 of Penn State’s roughly 44,000 students, according to the release.Graham Spanier, the president of Penn State, said the shift to direct lending would guarantee that students would not lose access to federal aid:

“We have a responsibility to our students to help them obtain financial aid that allows them access to a Penn State 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.”

Spellings to College Presidents: Don’t Panic on Federal Student Loan Availability

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.”

A Silver Lining from the Credit Crunch

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.

Weekly Roundup: February 25 - February 29

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

Kennedy and Miller Weigh In on Credit Crunch and Student Loans

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.

Panic is the Enemy

Repeat after us: There is no federal student loan crisis. There is zero danger that federal Stafford loans will not be available in the foreseeable future. Zero danger. At some point in the future, there may be a squeeze on private student loan availability for some high risk borrowers, particularly those attending proprietary schools of questionable quality and limited track record as opposed to all proprietary schools. Should a large private student loan access issue arise, extending even beyond proprietary schools, there are options for federal action to ensure the availability of capital. But let’s not get ahead of ourselves.

Roundup: Week of February 11 - February 15

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