Overcoming the Student Loan Crunch
THE RECENT ANNOUNCEMENTS made by many student loan companies that they would be tightening lending practices and increasing loan rates and fees highlights the importance of student financial aid counseling and the need for more need-based student aid funding.
In January, some of the nation's largest student loan companies announced that they would tighten their lending policies and discontinue lending to students with a higher risk for default. Lenders say these changes are due to recent congressional action that cut Federal Family Education Loan Program (FFELP) subsidies, compounded by continuing disruptions in the credit markets sparked by troubles in the mortgage lending industry.
"Eight months ago, as long as the applicant was breathing, [lenders] approved everything," Harris Miller, president of the Career College Association, told <em>BusinessWeek</em>. "Now, everyone is looking at every loan and every piece of paper with a flyspeck."
Career colleges and the students at these institutions are expected to be the most affected by changing lender policies because they serve a larger number of low-income students who are more likely to have poor credit scores, less likely to graduate, and more likely to default. "Access to private lending sources is absolutely critical for many working adults to be able to bridge the gap between federal grant and loan program limits and actual tuition costs," said Miller in a press release. "Many lenders have stopped subprime private lending and may stop private lending altogether. Their retreat may leave many students unable to finance the balance of their educations."
Unfortunately, access to private loans has become critical for many students, because funding for need-based financial aid programs has not kept up with higher education costs. Increasing investments in financial aid would help alleviate this precarious reliance on private education loans.
There is considerable disagreement about the effect of stricter lending standards. Some argue that this is good for students because it prevents them from taking out private loans that generally have less favorable terms than federal loans and can cause significant burdens on borrowers.
Kalman A. Chany, author of <em>Paying for College without Going Broke</em> (The Princeton Review), first published in 1992, argues that too many students and families take out private loans before taking full advantage of federal loan programs, which are available to students with no credit history, provide more favorable repayment options, and are generally cheaper. Some believe that the stricter lending standards will force more families to borrow through federal loan programs before borrowing from private institutions.
Chany's observation highlights the importance of counseling from the student financial aid office and the danger of direct-to-consumer marketing of private education loans. Students and parents who take out private loans marketed directly to them without counseling from the financial aid office are less likely to exhaust cheaper federal loan options.
Counseling helps ensure that students take full advantage of federal, state, local, and institutional financial aid and avoid taking out private loans with unreasonable terms. In addition, the financial aid office can provide students with general financial guidance so they do not take on excessive debt levels, given their future career plans.
Another consequence of stricter lending practices is higher loan costs for students. In response to news that Sallie Mae would no longer lend to students at his school, Robert Herzog, <b>Indiana Business College</b>'s chief financial officer, told <em>BusinessWeek</em>, "I don't have any doubt that there will be other avenues for us to look at, but it will come at a higher cost for the students and for the institutions."
In addition to higher costs caused by fewer loan options, many lenders have increased interest rates and fees and reduced benefits on student loans. Reports from financial aid offices around the country indicate that students will pay more for their loans.
There have also been rumors that in the short term, borrowers could see an additional shortage of financing options because of the difficulty loan companies are having in raising capital to disburse new loans. Lenders are seeing their securitization and bond ratings drop, and investors are more reluctant to bail them out given the problems in other areas of the market.
Unfortunately, the combination of higher rates and fees and limited financing options will hit low-income borrowers harder than other students because access to student loans can make or break their opportunity to go to college. This is just another reason it is critical to provide more financial aid to low-income students. Without a greater investment, these students may be forced to take out more expensive loans that they will be less likely to repay, or worse-they may have no options to pay for college.
A greater investment in need-based financial aid combined with sufficient counseling through the financial aid office can help mitigate the negative impacts the recent changes in the student loan environment will have on the nation's most vulnerable students.
<em>Haley Chitty is assistant director of communications at NASFAA, www.nasfaa.org.</em>