Forked Tongue
Higher Ed Watch, Student Loans
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Higher Ed Watch, Student Loans
When it comes to private student loans, loan giant Sallie Mae speaks out of both sides of its mouth. Case in point: Sallie Mae officials say they go out of their way to persuade students to exhaust their federal student loan eligibility before taking out more costly private loans. Not exactly.
It's true that on its website and in some of its marketing material, the company urges students to follow "Sallie Mae's 1-2-3 approach to paying for college," which recommends that they first apply for grants and scholarships, then for federal loans, and if a gap remains, then, and only then, consider taking out private loans. "Remember you should only use private student loans as extra funding after you've used all other sources of financial aid," a Sallie Mae podcast on the 1-2-3 approach states. "As with any student loan, always be conservative. You want to borrow only what you absolutely need to pay for school, not your lifestyle."
Sounds like good corporate citizen behavior, right? We thought so, until we saw the advertisement below on the Google search engine in which the primary selling point for Sallie Mae's private loans is that students don't have to file the Free Application for Federal Student Aid (FAFSA) to get them.
"No FAFSA" blares the Sallie Mae paid for advertisement.
In other words, Sallie Mae is marketing the convenience of applying for private loans, in contrast to federal loans. Unlike cheaper, safer federal loans, there are no lengthy forms to fill out and you can get "quick preapproval." Students can obtain up to $40,000 in loans, so there is little need to apply for federal loans in the first place. All you have to do is click on the ad and you are taken to a page that includes a link to the "quick online application and pre-approval process." (Although to be fair, in teeny-tiny type, buried amidst tax code references, Sallie Mae does say "students seeking federal financial assistance should seek that assistance first." The size and placement bespeak a disingenuousness, however.)
Sallie Mae is hardly the only private lender to make this type of implicit avoid the FAFSA pitch. But it is the largest student loan company in the country and if it decided to provide private loans only to those who had first exhausted their federal student loan options, it could have a major impact on borrowers' lives and the loan industry as a whole.
In May, JC Flowers and Company, the private equity firm that was poised to purchase Sallie Mae had promised to introduce reforms to the company's lending practices including "new disclosure and certification procedures" designed to "ensure that students understand all lower-cost options before taking out private loans." Such changes would be welcome, and we hope that Sallie Mae's leaders would consider moving forward with them even though the buyout deal has collapsed.
Federal Loan Exhaustion
Why does Sallie Mae's marketing matter so much? Because according to the Institute for Higher Education Policy, 20 percent of dependent students -- one in five students -- with private loans take out no federal student loans, even though they're vastly cheaper. An additional 19 percent of private loan students who also have federal loans fail to borrow up to the federal limits.
Now a minority of students may have legitimate reasons for taking out private loans instead of much cheaper and safer federal loans, but it's difficult for us to imagine many good reasons why. As Sallie Mae acknowledges in its "1-2-3" podcast, federal loans are a much, much better deal for students than private student loans, and offer important protections and more flexible repayment options than private loan providers supply.
What can policymakers do about this federal loan exhaustion issue? Well, currently two options are on the table. Congress could require lenders to more clearly disclose the benefits of borrowing federal loans first, as legislation that the Senate Banking Committee approved in August would do. But as we have seen with Sallie Mae as advertised on the Google website, lenders are apt to say and do two very different things.
Another option is to require colleges to certify private education loans before students can receive them. As we've noted, financial aid administrators at Barnard College and Colorado State University have shown the benefits of this approach. Through targeted counseling efforts that take place prior to certification, Barnard and the much larger Colorado State have been able to dissuade students from taking on private loans prior to exhausting their federal student loan eligibility first.
On the other hand, our reporting and that of others has shown that colleges are not above reproach in steering students to lenders that have provided their institutions and them with gifts and payments. We have also found that some colleges have put students in harm's way by including private loans in the financial aid packages that they offer students. This latter practice gives students the misleading impression that they are obligated to take out these loans. It also gives them the impression that these loans have the colleges' imprimatur -- and therefore must have pretty reasonable terms, which they often do not.
In Search of a Good Answer
How does one promote federal loan exhaustion prior to private loan assumption? In the absence of a more creative approach, it comes down to a policy decision between requiring lenders to supply more information to borrowers vs. requiring schools to certify private loans prior to student assumption.
Who do you trust more to protect student loan borrowers? The lenders or the colleges? Faced with only those two options, we'd have to go with the colleges, but with some serious reservations. In the coming days, we'll try to find a better answer and in the meantime welcome your suggestions. Maybe JC Flowers has an idea.
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Why not do both?
"Students have no informed,
"Students have no informed, disinterested advocate for navigating the college aid process."
What about the students themselves? Are we claiming that students are unable to navigate the higher education financing waters by themselves? Wow, we trust Americans who are >= 18 to vote, volunteer for combat, and enter into and be bound by contracts. But we can't trust them to make informed decisions when it comes to student financing? Interesting. Or, how about the fact that many private student loans have co-signers? Opps, forgot about the co-signer. Funny that it receives no press that many private student loans have co-signers (FMD loans are usually 75% to 80% co-signed). Can't point you to the statistic, but many co-signers are parents who are in their 50s. Are we saying that parents haven't been around the block too? They haven't bought homes, cars, etc., and know a little about financing and the need to shop around by the time they are in their 50s? That they won't attempt to steer their loved-one away from making a misinformed decision? That's interesting also.
These arguments for more regulation have no basis in fact. Facts are: 80% dependent undergraduates and 76% of independent undergraduates borrow from the Federal government also when they borrow a private loan. Facts are: those same people borrow 82% and 53% of the maximum Stafford loan respectively. (I pulled these statistics from the Institute for Higher Education Policy study by the way). Now, why don't more people borrow from the government or max-out what they have borrowed from the government? Who knows? NAF hasn't proven any malfeasance in this regard. Cuomo hasn't proven any malfeasance. Kennedy, Miller, and Dodd, haven't proven any malfeasance.
And what happens when people do decide to forgo federal loans altogether and finance their educations solely with private loan debt? Do they not get the benefits of the degree just because they borrowed from private industry? Do the earnings premiums the College Board cites disappear when government subsidies are not involved? Yes, the premiums aren't as great when private loans are used b/c private loans are more expensive then government taxpayer sponsored-loans, but those earnings premiums are still there and are still substantial.
Finally, is Sallie Mae immoral for advertising that it's private loan product is easier to obtain then it's cheaper Federal counterparts? Is it immoral for BMW to sell transportation that is more expensive then let's say your average KIA? Both do the same thing, transport people from point A to point B more quickly then walking from point A to point B. However, one is more expensive than the other. Yet we don't go running to Congress to regulate the way BMW sells it's cars.
Leave the value judgements to the people who make those value judgements. Save your value judgements for your own individual lives. That is the great thing (or used to be) about our society.
"No FAFSA"
Isn't there a deadline for FAFSA, after which students can't get the aid they need for a given term? I know that, when I was in college, I needed to get loan assistance after the deadline had passed on at least one occasion. Isn't it possible that other students are in the same predicament?
When viewed in that light, couldn't "No FAFSA" mean "You're not totally out of options" rather than some nefarious attempt to lure or dupe students? In fact, unlike the small print warning you mentioned in this piece, when one clicks on the ad it also says (in quite large print in the center of the screen)
"Designed to cover any qualified higher education expenses when federal funds aren't enough." Or, one assumes, unavailable.Shouldn't NAF just put all of the information out there and then let readers make up their minds, rather than banking on the fact that readers won't follow the links in the story and investigate the issue themselves? I love reading the blog and agree with a lot of what you guys put out there, but trying to will a scandal into being or throwing Sallie Mae into a story because it seems "sexier" seems cheap to me.
NO FAFSA
Thanks for reading. We simply disagree on substance.
We believe it is disingenuous for Sallie Mae or any other lender to say that they urge students to exhaust their federal student loan eligibility before taking out private loans, but at the same time advertise their private loans by emphasizing that students don't need to fill out a FAFSA to get them. Talk is cheap, if not backed up by real action.
Co-signers
What does New America think about Patrick's comment on co-signers?
Patrick, do you have any stats on what % of loans managed by large private lenders are for customers who carry only federal loans with the providers?
My guess is that when you take that number, together with the % of students who have co-signers, the number of "helpless" students we're talking about is miniscule.
Dani, wish I did have more co-signer statistics
Dani, most lenders in the space try to steer their borrowers to a co-signer (for many reasons). Public securitization transactions are the best place to get that information. First Marblehead ("FMD") is generally in the 75% to 80% range. If you look at Sallie Mae securitization transactions it's more of a 50/50 split. Overall, just my best guesstimate, I'd say private loans are probably about 70% co-signed (more or less). The students who don't have co-signed loans generally have the better, more established / longer credit histories (which one could further argue debunks the naive student myth). Borrowers have an incentive to get a co-signer also because the loans are cheaper. So, I think you would be secure statistically in projecting that 70% co-signed figure to the 20% of borrowers who don't take-out federal loans at all.
NAF, and our bumbling politicians want to put these loans through the financial aid office. Since they both seem incapable of addressing the real issue (rent-seeking schools) these loans will become ever more important. That's why it's also important that the school not "certify" the loans. That doesn't lead to a vibrant, and competitive marketplace (examples abound today). The other underlying issue here is that it's anathema for socialists to support free-markets in any shape or form in education (any type of education: secondary, post-secondary). Even though most reforms you hear touted today incorporate the accountability and incentives you'd get from free-markets. No, education is the bastion of the left, and we are all hypocrites when it comes to our politics.
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