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Financial Aid

The Economy and Student Financial Aid

Troubling trends—and the silver lining
University Business, Jan 2009

THE ECONOMIC DOWNTURN is sweeping the nation, affecting nearly everything and everyone. Financial aid is no different. The shaky economy has sparked several trends threatening to place unprecedented strains on financial aid programs and budgets. Many aid administrators are predicting that an increasing demand for assistance will coincide with a decreasing supply of student aid dollars as federal, state, institutional, and private aid providers wrestle with difficult budget decisions.

Dave Gruen, director of financial aid at the University of Wyoming, says he and his colleagues are noticing increasing anxiety among students and parents and a greater demand for student aid. “We are starting to see the beginning swells of potential tsunami waves reaching our shores,” explains Gruen, who is the 2008-2009 national chair of the National Association of Student Financial Aid Administrators (NASFAA).

Congress passed several student aid bills before the economic downturn fully hit.

Aid administrators across the country are reporting similar troubling trends. But despite that, there is some good news. Unlike some sectors, the financial aid sector is in relatively good shape. Recent action by Congress and the Bush administration has helped insulate financial aid from the economic turbulence.

Several factors are contributing to the high demand for higher education and financial aid. Historically, demand for higher education increases during times of economic distress as job losses and a weak job market drive people back to college to retrain and gain new skills. Higher education institutions are beginning to see an uptick in adult learners returning to college concurrently with the graduation of the largest population of high school students looking to attend college.

At the same time, the economic downturn has hurt these students’ ability to pay for college, causing more of them to apply and qualify for financial aid. Financial aid offices at IHEs across the country are seeing an increase in the number of students and families who are eligible for financial aid because of deteriorating financial situations like loss of income or declining assets. Many NASFAA members predict that this trend will become even more prominent in coming years.

The impact of this increased demand is being felt in the Federal Pell Grant Program. Roughly 786,000 more applicants have received a Pell Grant this year compared to the same time last year. This has caused a $6 billion shortfall in the program. Congress provided $2.5 billion to pay down this shortfall when it passed the continuing resolution (CR) to extend the federal budget. The CR also forbids the U.S. Department of Education from reducing any Pell Grant recipient’s award until the CR expires on March 6.

Higher education associations, including NASFAA, have urged Congress to eliminate the remaining $3.5 billion shortfall and increase the maximum Pell Grant by $500 as part of economic stimulus legislation. “Congress would immediately provide economic relief for college students and their families, as well as adults returning to college to learn new job skills, by providing a $500 increase in the maximum Federal Pell Grant,” NASFAA President and CEO Philip Day wrote in a letter to lawmakers.

Instability in the student loan industry has caused much anxiety for students, financial aid officers, and lawmakers. The freezing of the credit markets has caused many student loan providers to suspend lending and/or stop lending to certain students at certain types of higher education institutions.

This spurred quick action. Congress passed the Ensuring Continued Access to Student Loans Act (ECASLA), giving the Department of Education the authority to purchase student loans and provide liquidity for lenders to make more loans. To date, NASFAA knows of no student who has been denied access to a federal student loan.

Fortunately for students, Congress passed several student aid bills before the economic downturn fully hit. Among other things, these bills increased student aid and loan limits, relaxed some aid eligibility requirements, and created new borrower benefits for students and families.

While federal loan availability has not been disrupted, the loan industry has changed. Making student loans has become less profitable for providers, forcing them to eliminate benefits and incentives previously offered to borrowers. This has raised the cost of borrowing federal loans (although those costs are mitigated by legislation that caps federal loan interest rates and offers safeguards to borrowers in repayment). Also, anxiety about the ability of providers to keep making loans has driven many institutions into the Direct Loan program, reversing the recent trend of declining Direct Loan participation.

Looking forward, there is growing concern that a dismal job market will cause more borrowers to become delinquent or default on their loans. These concerns prompted Congress to consider extending the grace period before student loan repayment from six to nine months.

But even as the federal loan market received government reinforcement, private or alternative student loans have become unavailable for many students. A recent survey by FastWeb, a free online scholarship-matching service, found that nearly half of private student loan applicants are denied. The survey also found that more than half of families (56 percent) who apply for Federal Parent Loans for Undergraduate Students (PLUS) or commercial home equity loans (54 percent) to pay for college do not obtain them.

There may be some relief for student loan providers in the near future, which would help alleviate student and administrator anxiety about loan availability. Treasury Secretary Henry Paulson announced in November that the administration’s $700 billion economic stimulus plan would be refocused to help consumer lenders, including student loan providers. Congress is also considering an increase in federal loan limits to alleviate the need for families to rely on private financing.

Quick action by Congress and the Department of Education has helped insulate federal student aid from the economic turmoil, but the student aid provided by states and institutions will likely face a rockier road. States and higher education institutions have not yet felt the full impact of the economic downturn, but most are bracing for significant declines in revenue in the near future.

The economic turmoil is forcing families to critically analyze the costs and benefits of college.

The National Governors Association (NGA) estimates that states’ combined budget shortfalls for the 2009 fiscal year will grow to about $60 billion and then $80 billion in the 2010 fiscal year. NASFAA members have also reported that their institutions are anticipating reduced or flat state funding for higher education and that many are looking for ways to insulate their financial aid budget by cutting spending in other areas and increasing support from endowments.

Unlike the federal government, which can run a deficit each year, state constitutions generally require legislators to provide balanced budgets. State governments will be scrambling to cut spending to balance those budgets, and higher education appropriations have been targets in past recessions. In anticipation of possible cuts to higher education, the NGA wrote the Department of Education pleading for a waiver of a provision in the recently enacted Higher Education Opportunity Act (HEOA) that penalizes states unable to maintain spending levels for higher education. The provision prohibits states that don’t maintain higher education spending levels from accessing all federal College Access Challenge Grant funding. The funding is used to provide low-income students with need-based aid, financial counseling, debt management, interest-rate reductions, assistance in completing the FAFSA, and numerous other services. Eliminating this funding for certain states would place an additional burden on already strained budgets and force the states in the greatest financial trouble to make some tough decisions about spending cuts to offset this loss of federal revenue.

Quick action by the federal government combined with the student aid benefits included in legislation passed before the economic downturn has put student aid in a relatively stable position. However, the real challenge will be providing affordable higher education in the coming years as the full impact of the recession reverberates throughout the country.

One positive unintended consequence of these upcoming lean years may be a more savvy higher education consumer. The economic turmoil is already forcing families to investigate all of their higher education options and make better informed decisions about higher education by critically analyzing the costs and benefits of college. Students and families are also more likely to exhaust all of their financial aid options before simply borrowing an alternative loan.

The coming years will present some significant challenges for IHEs, their financial aid offices, and students and parents. But if these challenges are addressed appropriately, it could set the stage for stronger student aid programs that better serve the needs of students and parents. It may also motivate families to better understand their higher education options, the student aid programs, and the risks and benefits of borrowing for post secondary education.

Haley Chitty is assistant director of communications at the National Association of Student Financial Aid Administrators,