Some banking industry experts have long regarded the federal student loan program, established in 1965, as one of the most successful public-private partnerships ever created. A historically steady and reliable source of financing for parents and college students needing help paying for school, the federal student loan program also used to be a mostly risk-free and profitable venture for private lenders issuing government-backed student loans.
But all that changed, says Harrison Wadsworth, special counsel to the Consumer Bankers Association, when Congress passed the College Cost Reduction and Access Act in the fall of last year, tilting the storied partnership squarely toward the public side, as the bill positioned the government to assume a larger role as lender and manager of student loans.
The legislation, which was aimed at increasing college affordability, raised Pell Grant award amounts for low-income students and lowered interest rates on certain need-based federal student loans — but in order to pay for these measures without passing the cost on to taxpayers, the bill also cut $21 billion in government subsidies to private lenders of federal college loans and doubled the fees that lenders are required to pay the government for every loan they issue.
These subsidy cuts and the resulting unprofitability of federal student loans, followed by the “spillover effect” of the subprime mortgage crisis into credit-based private student loans, have pushed the student loan industry to the breaking point. Liquidity for new student loans is scarce, credit restrictions on private student loans keep tightening, news continues to break almost daily of major lenders that have suspended either their federal or private student loan programs or both, and public confidence in the availability of student loans is shaken, despite the government’s efforts to allay families’ and schools’ concerns.
Government Still Working Out the Kinks
In an effort to counter spreading apprehensions about the viability of college financing, lawmakers passed emergency legislation in May that raised the college loan limits on certain federal student loans and that authorizes the Education Department to purchase federal college loans from private lenders as a way of providing struggling student loan providers with the liquidity they need to resume or to continue issuing federal parent and student loans.
This bill, the Ensuring Continued Access to Student Loans Act (HR 5715), was designed specifically, in part, to assure families and schools that federal student loans would be readily available.
But according to a recent survey, financial aid administrators are still concerned that the legislation is a short-term fix and doesn’t do enough to ensure the longer-term availability of college loans.
The survey, sent to members of the National Association of Student Financial Aid Administrators, found that despite the government’s assurances, worries persist that students may not be able to get the college loans they need to pay for school:
* 52% of the NASFAA members who responded to the survey said that the emergency legislation hadn’t resolved the perceived “student loan crunch.”
* 56% indicated that at least one lender they had used as a provider of federal financial aid would no longer issue federal college loans to students at their schools.
* More than half believed it would be harder this year for their students to obtain private student loans.
Sinking Economy Stands to Hurt Smaller Colleges the Most
The sustained credit crunch has led lenders in every sector to tighten their credit criteria, meaning that the financial resources that parents and students have traditionally turned to in order to supplement their federal financial aid and help pay for college — private student loans, home equity loans, stocks and investments, lines of credit — are becoming increasingly unavailable.
And with families’ savings and finances buckling under the additional strain of a slumping economy, record-breaking gas prices, rising food costs, surging unemployment, and a weak job market, colleges and universities may begin to see more students who are struggling to afford to go to college. As more students opt for less-expensive schools, it’s the small private colleges with higher tuition costs that may suffer the most, warns Moody’s Investors Service in a recent report.
The report from the international bond-rating agency reveals that more students may start choosing to live at home and attend a commuter school rather than an out-of-state university that would require living on campus and incurring thousands of dollars in room and board costs.
“There are a lot of hard choices,” says Larry Warder, chief financial officer for the Department of Education, “and if you can’t afford a Cadillac, you buy a Chevrolet.”
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