Is there a crisis looming in the student loan industry? Are we in the midst of one already? Depending on what you read, the answer is both "yes" and "no."
Certainly, the recent plan released by the Department of Education outlining how they would provide liquidity to FFELP lenders was a needed shot in the arm, resulting in confirmation from several lenders that they would either remain or regain participation in the program for 2008-09. Nevertheless, this does not mean that financial aid directors can breathe a sigh of relief. The summer processing season is sure to be a challenge. Are you prepared? Have you prepared your boss, the president, and appropriate leadership on campus for what lies ahead and how it may affect enrollment and retention? If not, you must do so immediately!
Following are some challenges for both schools and students that may negatively affect your students' ability to enroll or re-enroll this fall. Combined, they can create "the perfect storm." The best approach to minimize the impact is preparation and communication.
Federal Stafford Loan Program - Again, despite the recent good news regarding the availability of loan funding, there remains a long list of "to-do's" to prepare for 2008-09 process. For example, at FFELP institutions, have you determined the number of students and volume of loan disbursements affected by lenders leaving the program? Have you begun outreach and communication efforts to assist returning students who will need to choose a new lender in completing and signing a new Master Promissory Note (MPN)?
Certain institutions may have difficulty finding lenders willing to provide funding if their populations are at a higher risk of default -- such as community colleges, proprietary colleges, and historically black colleges. Some lenders have already begun to notify schools that they will not be in a position to lend to their students this fall.
The Department of Education has also recently clarified new regulations regarding the development of preferred lender lists. In particular, recent guidance eases the restrictions put in place last year by Congress on the ability of colleges to recommend loan companies to their students; nonetheless, restrictions still remain regarding the number of and relationships between recommend lenders.
At some schools, the added administrative burden has led financial aid officers to question whether these lists are necessary at all. At others, the decision to continue has come with the added burden of preparing RFIs/RFPs and completing a more detailed process of deciding which lenders to recommend (although the decision is somewhat easier, given that so many lenders have ceased participation in the program).
For some, the decision to move from FFELP to Direct Lending was clearer now than ever before and the process has begun. While this approach helps guarantee Stafford Loan availability, it requires that financial aid and student accounts staff change courses quickly and learn a new way of processing and disbursing funds. Given that most colleges are only weeks away from sending fall semester bills (and have already begun billing for summer terms), there is a potential for a bottleneck in the process. The bottom line - all of this may have a significant effect on cash flow. Is your controller and/or vice president of finance prepared?
Private Loans: In recent years, the use of private loans to finance a college education has grown exponentially. According the The College Board report, "2007 Trends in Student Aid," private loan borrowing grew from 6 percent of the $38 billion in total loan volume in 1996-97 to 24 percent of the $77 billion borrowed in 2006-07. For 2008-09, the availability of funding for private loans will be limited. Do you know how many of your students use a private loan to finance their education? Have you communicated with them regarding the potential that fewer funds may be available? For some, this may lead to serious retention issues. Best not to find out at the 11th hour.
Credit Approval: Another concern related to accessing loan funds is the reality of tighter credit checks for parents pursuing Federal PLUS loans and for students and co-signers of private loans. In many cases, applicants who would have been approved in the past will now be denied, even if their credit standing is not bad. What other option can you offer when Federal PLUS and private loan applications are denied and the additional unsubsidized Stafford Loan is not enough?
Home Equity Lines - For many families, tapping into home equity lines of credit has been a popular option for financing secondary and post-secondary education. Given the issues prevalent in the mortgage industry, it is likely that many families who have had access to these funds in the past will no longer be able to borrow against their home. Although it is difficult to determine which families use home equity lines to pay the tuition bill, it is likely that the financial aid office will see an increase in traffic from families looking desperately for other financing options. What can you offer?
Federal Perkins Loan: A side-effect of the lagging economy, whether anticipated or not, has been the decline in repayment of Federal Perkins Loans. Because the loan program is campus-based and awarded as a revolving fund, less repayment equals less new loans. With the growth in consolidation loans over the last several years and the recent downturn in the economy, institutions are reporting less repayment from borrowers. Therefore, many institutions have reported concerns about honoring existing commitments to students who have borrowed a Perkins Loan in the past, let alone the ability to award new loans.
Do you know what your Perkins level of expenditure will be for 2008-09? Planning for awarding levels similar to 2007-08 may not be realistic.
Loss of Borrower Benefits: One of the immediate results of changes in the student loan industry has been the loss of borrower benefits, such as the reduction/elimination of fees and interest rates, in federal and non-federal loan programs. Over time, this will increase the cost of borrowing and potentially affect the ability of students to meet repayment obligations.
More Expensive Private Loans: For those students who are approved to borrow additional nonfederal loans, the costs in higher interest rates and fees could be significant. All federal loan options should be exhausted before pursuing additional private funds. However, many students, especially those at private institutions, have borrowed $10,000 to $20,000 per year in non-federal loans and will be faced with not only lower approval rates, but also more expensive conditions. How will they replace non-federal loan funding when applications are suddenly denied?
Increase in Federal PLUS Denials: Parents will not be exempt from the increase in loan denials. Although Federal PLUS interest rates will remain unchanged for 2008-09, lenders have indicated that the number of denials will increase. In many cases, parents who would have typically been approved will be denied. While the additional unsubsidized Stafford Loan will be an option, students may need more than the $6,000-$7,000 limit.
The underlying theme is clear -- the financing options used in the past by schools to help pay for college will not be as accessible as they have in the past. In my ten years as a financial aid director, the most difficult issue was helping students stay in school when the Unsubsidized Stafford Loan resulting from a PLUS denial wasn't enough, Perkins loan funds were exhausted, and private and home equity loan options were denied. This will occur much more frequently than it did in the past. Even if your institution doesn't have any options, you should be prepared for those difficult conversations. And, at the same time, make every effort to not disrupt cash flow, expect more telephone calls and personal appointments, and ensure that retention of students doesn't decline unexpectedly based on availability -- or lack of -- financial aid resources.
The recent increase in additional unsubsidized Stafford Loan limits applicable to undergraduate students, and the Department of Education's plan to provide liquidity to the FFELP market, are certainly signs of improvement. Yet, it is likely that the summer season of loan processing and fall semester billing will bring the issue of affordability to the forefront. Even for aid officers who have prepared and communicated with their students and parents, the summer is going to be long. For those who have not begun to prepare - it is time to start! First step, a meeting with your boss and senior staff to make sure that everyone is aware and moving ahead with a consistent communication and implementation plan.
<em>Samantha Veeder is a senior consultant for Scannell & Kurz, Inc., a Pittsford, N.Y.-based firm that works with higher education institutions on financial aid, recruitment, retention, and enrollment management. She is co-author, with Jim Scannell and Kathy Kurz, of the column "Money Matters," which appears regularly in</em> University Business.