The State of Student Aid
IT WAS THE DISASTER THAT DIDN'T happen, despite the headlines in national and local newspapers throughout the spring of 2008. “College Financial Aid System ‘In Crisis,’” proclaimed USA Today. “No Funds to Lend to 40,000 Students,” blared the Boston Globe. “Student Loans Start to Bypass 2-Year Colleges,” warned The New York Times.
The dire news stemmed from the conga line of credit-stricken banks exiting the Federal Family Education Loan Program (FFELP) and the rolling shutdown of state educational finance agencies—which offer private student loans—from Colorado and Missouri to Michigan and Massachusetts.
But financial aid officers at schools around the country have been able to exhale over the past academic year, having for the most part weathered the credit meltdown—and its impact on the nearly $100 billion annual student loan market—with only a considerable amount of inconvenience. Along the way, they have followed an evolving approach to student borrowing and financial aid.
“Last year, when some banks were pulling out of our loan program, it created chaos for us when things changed at the last minute,” admits Catherine Geier, vice president for enrollment services at Trinity Washington University (D.C.), where 98 percent of the student body receives loans and/or tuition grants to defray the $29,000 annual cost of attending. “But we had a lot more media calling about the credit crisis than we had students coming into the office with an individual problem.”
For students and officials at Colorado’s community colleges, the outcome of last year’s credit crisis was angst-ridden. “I’d call our banks and they’d say they were still on board. But an hour later they’d call back and say, ‘The national office won’t let us lend,’” recalls Nancy McCallin, president of the 13-school system, who helped cobble together groups of preferred lenders at each institution. “They were redlining us. Students were very concerned, because they were being turned down by their traditional lenders. Many of them had to apply to three or four banks.”
Most disruptions to the college loan market were put to rest in May 2008 by the federal Ensuring Continuing Access to Student Loans Act (ECASLA), which has been extended through June 2010. The legislation authorizes the U.S. Department of Education to buy up FFELP loans, leaving the lenders more capital to make new loans.
The law also increases the annual limit on Stafford Loans by $2,000 and eases some “adverse credit” restrictions on Parent PLUS Loans. For one, previous rules disqualifying borrowers more than 90 days behind in credit payments have been stretched to 180 days.
“We would have been in a lot worse shape without the legislation,” says Mark Kantrowitz, publisher of FinAid, an online student guide to financial aid. Last fall, a National Association of Independent Colleges and Universities survey found no widespread student loan crisis among the almost 500 members that responded.
Not that there haven’t been credit casualties at institutions private and public. The NAICU report noted that 20 percent of its respondents experienced “significant delays” in FFELP disbursements. At the University of Wisconsin, Oshkosh, some students in the accelerated nursing program, which has a higher cost than the $16,800 for other students at the public university, could not get the supplementary private loans they needed to enroll or continue. At Allegheny College (Pa.), some private borrowers have had to pay higher rates because lenders have tightened credit requirements.
For many schools, the recent ordeal of finding available FFELP lenders has prompted them to turn to the Federal Direct Lending Program, established in 1993 to process all federal student loans. Schools can subscribe to only one program at a time.
“I will not subject our students to uncertainty over whether or not they can get a loan to go to college,” says the Colorado Community College System’s McCallin, who made the transition for the spring 2009 term. “Going to DL made the process much more streamlined for us, and the transition was much smoother than we expected. It was a no-brainer.”
Geier made the same move a term earlier. “Even though DL is not perfect, the crisis last year made us realize how much we value stability in the student loan process,” she explains.
For all the maneuvering to keep the college loan pipeline flowing reliably, the biggest challenge of the troubled economy, say university and college officials, is keeping up with the flood of requests for financial aid.
“We expected to be doing a lot of special circumstances for the coming academic year, and we still have a concern,” says Emily Bliss, director of the Office of Scholarships and Financial Aid at the University of North Carolina, Wilmington, who notes that her office has processed an additional 500 FAFSAs for the 12,200-student school. “This year we’ve been getting lots of phone calls saying, ‘I lost my job.’” While UNC Wilmington usually determines financial aid based on past income, Bliss has changed the formula this year to allow for lost income caused by recent unemployment.
“Families that invested in 529 college savings plans might have seen their investments go down 40 percent last year,” Kantrowitz points out. That helps account for the 10.5 percent rise in FAFSAs nationwide between 2007 and 2008, compared to 5 percent in average years. And for the first quarter of 2009, the increase came in at 20 percent compared to the same period last year.
“Ten percent is high. Twenty percent is a very significant increase,” says Kantrowitz, adding that the demand is occurring at a time when many schools can least afford it. “Endowments and charitable contributions are down, and bonds to fund construction might have reset at a higher rate, but so far schools have been protecting aid to students.”
Rich Doherty, president of the Association of Independent Colleges and Universities in Massachusetts, has seen those commitments firsthand. “Boston College recently made a 2 percent cut across all departments and reallocated the savings for financial aid, and lots of schools are doing things similar to that,” he says, noting that 98 percent of the AICU’s 60 schools in Massachusetts plan to increase financial aid in the coming academic year.
At the University of Wisconsin, Oshkosh, Chancellor Richard Wells has mobilized a Student Financial Emergency Response Team, including the vice chancellor of student affairs, a representative from administrative services, and Beatriz Contreras, director of financial aid. “We put a team together to respond proactively,” says Contreras, whose office began sending out e-mails to the student body. “The message was, ‘Come talk to us if you think you’re going to have trouble making ends meet.’” That effort resulted in more than 100 reply e-mails and a number of walk-ins, as well as more than a 15 percent increase in requests for financial aid revisions.
Contreras’s office also restructured a short-term emergency loan program, raising the amount students could borrow from $500 to $1,000 and extending the repayment period from one semester to a year. “We’ve helped students and parents see that everything isn’t in black and white,” she says. “We can’t work miracles, but there are options.”
Over the past two years Texas Christian University in Fort Worth has increased its financial aid budget by 23 percent with an eye toward students in similar straits, explains Mike Scott, director of scholarships and student financial aid. “Our primary emphasis was to reach out to families before they reached out to us with special circumstances requests. I think we’ve lost a few, but we’ve been able to save a significant number, and our retention numbers for the coming year are up from the past year.”
At Allegheny, Financial Aid Director Sheryle Proper has made it a practice to import FAFSA information on a daily basis. “It lets us stay up-to-date,” she explains. “As soon as a family notifies us of a special circumstance, we can address it immediately. We’ve hit our enrollment deposit goals for the coming academic year, and I can’t imagine that being the case if we hadn’t assured families early on that we would help them out financially.”
Stetson University (Fla.) has taken even bolder steps. This year the board of trustees anted up $2.3 million to fund the school’s new We Believe in You Scholarships, which range from $500 to $5,000. Deborah Thompson, the school’s vice president for enrollment management, estimates that dozens of students would not have been able to return this past spring or the coming fall without the additional funding.
“The students we helped had no other resources,” Thompson says. “When we called students, they were very emotional because they had been so hopeless. I’ve worked in this industry for 20 years, and $2.3 million in this economy is pretty extraordinary.”
One recipient is rising sophomore Damecia Jackson, for whom subsidized and unsubsidized Stafford Loans and an $8,000 scholarship still fall short in meeting the $42,000 annual cost of a Stetson education. Jackson says that the $500 she received to clear her outstanding balance at the school makes a real difference. “I wasn’t expecting this at all,” she says. “I come from a single parent household with four brothers and sisters, and money is very scarce.” Instead of using her summer earnings to pay off college bills, Jackson continues, she is saving for her textbooks in the fall.
The 2010-2011 budget submitted by President Barack Obama has a direct bearing on the future of how students pay for college. Pell Grants to students from low- and moderate-income families would increase to $5,500 and become a permanent line item (see “What About Pell?”). The $2,500 American Opportunity Tax Credit for college education included in this year’s federal stimulus package would also become permanent. And funding for low-interest Perkins Loans would increase fivefold to $5 billion a year, raising the number of Perkins recipients from 500,000 to nearly 3 million.
Also, the U.S. Department of Education would phase out the FFELP program by July 2010 in favor of the Federal Direct Lending Program, with a predicted cost savings of $48 billion over the next 10 years. Close to three-quarters of higher education institutions still use the FFELP, although the number of schools migrating to Direct Lending has accelerated. But the debate is just beginning over what the borrowing landscape should look like.
“We’ve been operating two separate loan programs to satisfy the same need. Something has to be done,” says Paul Combe, president and CEO of American Student Assistance, which serves as the guarantor of $46 billion in FFELP loans for two million borrowers. Referring to the College Cost Reduction Act of 2007, which limited the multibillion-dollar subsidies paid to participating lenders, he continues: “My gut says that because of the changes in the law two years ago and the credit crisis, FFELP is crippled. The core problem is that Congress sets the profit margin for lenders.”
Combe, a former financial aid director at Boston College, recalls that he preferred Direct Lending. “It solved a lot of problems when it came into being in the 1990s. With FFELP, I had to deal with 50 different systems from different lenders.”
UNC Wilmington has tried both FFELP and DL. “Direct is a much easier program to administer,” reports Financial Aid Director Bliss. “When we needed to reduce a loan, for instance, we could do it online. For FFELP banks, we would have to write out a check, and some banks haven’t been responsive in fixing problems.”
Erik Lotke, the research director for the D.C.-based advocacy group Campaign for America’s Future, argues that FFELP has outlived its usefulness. “There was a time when it made sense. There was a general gap in free market economics,” he explains, because banks were hesitant to dive deeply into the student loan business.
Lotke also expects pushback from the lending industry, particularly Sallie Mae, which manages $180 billion in education loans for 10 million borrowers. “We’re going to hear, ‘People are going to lose their jobs. It’s so much more complicated and universities won’t be able to handle it,’” says Lotke. His response: Many schools are already handling Direct Lending, and the move by all to DL would still mean FFELP lenders would administer the loans.
Others prefer the two-program system. “I’m a strong FFELP supporter, and the best thing that ever happened to FFELP was the Direct Loan program. It made lenders rise to the occasion and increase the quality of services,” says Sue Mead, who directs the Office of Financial Aid at Dutchess Community College (N.Y.).
Kantrowitz agrees. “I think there should be more competition,” he says. And TCU’s Scott doubts if a single federal lender can go it alone. “I do worry if Direct Lending can maintain customer service at a level comparable to private lenders,” he suggests.
Most observers agree that the days are past in which FFELP lenders use their federal subsidies to offer incentives, from waiving application or origination fees, to paying the loan insurance, to cutting rates for on-time payers. Sallie Mae has offered a decidedly modest counterproposal to the Obama plan that has private lenders originate student loans and sell them to the government after 120 days, much the way they have done under the temporary ECASLA legislation. Under the Sallie Mae proposal, lenders would be able to realize revenues on originating and servicing the loans and—during those first 120 days—earn interest at market rates, with a greater profit margin than at present.
Kantrowitz figures those wrinkles in the current ECASLA format would cost about $10 billion a year. “From that perspective, Sallie Mae’s come up with a proposal that would save 75 percent of the amount [that Direct Lending would save]. It becomes a matter for policy makers to decide if 75 percent is enough while avoiding the risk of a transition and the disruption of the student loan industry.”
Ron Schachter is a Boston-based freelance writer.