Suntech Student Loan

After reading Jim Wolfston’s Point of View “Let’s Kick the Lenders Out of the Student Loan System” (The Chronicle, February 27) I was surprised by its headline. A more appropriate headline would have been “Let’s Kick Schools Out of the Student Loan System.”

For 43 years, the higher education loan community has provided more than $650 billion to tens of millions of students. But the more important contributions of guaranty agencies, lenders, and other organizations come from the services they provide, which range from college access and financial literacy education to default prevention. In the past year alone, more than $52 billion in loans were averted from entering default.

A year ago even before the full extent of the mortgage crisis was known news stories predicted a crisis in student loans. The student loan community worked with Congress and the administration to formulate a solution to assure the availability of student loan funds at no cost to the federal government. As a result of the Ensuring Continued Access to Student Loans Act, every borrower who needed a student loan for the 2008-2009 school year was able to get one. And given the huge amount of debt the federal government is incurring to mitigate the broader financial meltdown, the student loan programs stand out. They are cost neutral to taxpayers and allow the federal government to avoid piling on additional dollars to the trillion dollar national debt by making sure that most student loans will be financed by the private capital markets, rather than the Treasury.

If, as Mr. Wolfston proposes, a college’s total student loan financing were to come from federal sources, the institution might be subject to uniform, one size fits all standards for tuition, fees, and executive compensation, and to reporting requirements more extensive than those that are in place today. Many states are already bristling at the increased federal oversight accompanying the stimulus bill funds, and colleges might react with similar apprehension. They would also lose the advantage of being able to choose their student loan providers. Today’s students are tomorrow’s alumni, and an unpleasant experience with a student loan might result in a lack of support to the institution.

The number of colleges and universities offering student loans through the government’s direct loan program rose sharply last year, a trend that could strengthen Obama administration efforts to end subsidies to lenders that provide student loans.

The administration’s budget proposes replacing the 44 year old Federal Family Education Loan Program with direct loans from the government. President Clinton created the direct loan program in 1993, but it has historically accounted for only a fraction of federal student loans.

In the past year, though, the number of colleges and universities originating loans through the direct loan program rose more than 50%, according to the Department of Education.

More than 1,600 schools were offering direct loans in February, up 548 from a year earlier, according to the Department of Education. During the same period, the number of schools that offer FFEL loans fell 3.6%. Still, FFEL loans continue to account for about three quarters of all student loans.

Obama’s budget calls for ending the government subsidized loan program by 2010. The administration estimates that would save the government $4 billion a year. Since the announcement Feb. 26, shares of student lenders have plummeted; Sallie Mae, the largest, is down more than 40%.

FFEL proponents dispute the savings estimates and say private lenders provide better customer service. Private lenders and loan guarantors have a system to help borrowers avoid defaulting on their loans, says Barry Feierstein, executive vice president for Sallie Mae. “That level of outreach doesn’t exist in the federal direct loan program,” he says.

Reasons schools are opting for direct lending:

*Lower costs. Bethel University in St. Paul will switch to direct lending this fall because it’s less expensive for borrowers, says Jeff Olson, director of financial aid. In the past, private lenders offered discounts on loan origination fees and other borrower benefits that made them more attractive, he says. But legislation enacted last year, which allows the Department of Education to buy loans lenders can’t sell to investors, bars lenders that participate in the program from offering such incentives.

*Financial worries. As a result of the credit crunch, fewer lenders are offering student loans. Only 10 lenders are participating in Auburn’s student loan program, down from 35 a year ago, says Mike Reynolds, director of financial services. Reynolds says he’s concerned about the ability of the remaining lenders to obtain funding for their loans.

Feierstein believes such fears are unfounded, now that the federal government has agreed to provide a backstop to private lenders. He’s urging schools that participate in the FFEL program to sit tight while Congress debates the president’s proposal. Auburn isn’t waiting: It will start offering loans through the direct loan program this summer.

The cost of postsecondary education in the U.S. has increased in recent years, but financial aid, which may be in the form of grants (no repayment needed), loans, and/or work study programs, is widely available to help families meet these expenses.

Most aid is limited to family financial need as determined by standard formulas. Students interested in receiving aid are advised to apply to university regardless of their ability to pay. Financial aid personnel at each school can provide information about programs available to students, steps to apply for them, and deadlines, all of which may vary.

All applicants for federal aid must file a Free Application for Federal Student Aid (FAFSA), generally as soon as possible after Jan. 1 for the academic year starting the following September. Figures provided should agree with federal income tax forms filed for the previous year. Other possible sources of aid include state governments, employers and unions, civic organizations, and the institutions themselves. There are also special federal programs that pay for postsecondary education in return for service: AmeriCorps (phone: 1-800-942-2677) and ROTC (phone: 1-800-USA-ROTC). Additional forms and certain fees may be required if a student is to be considered for institutional aid. Aid must be reapplied for annually.

A federal formula, based on information provided on the FAFSA, takes into account such factors as family income in the preceding calendar year, parental and student assets (excluding the parents’ home or farm), length of time to parents’ retirement, and unusual expenses (such as very high medical expenses).

The resulting Expected Family Contribution, or EFC (which is divided among the family members excluding parents in college), is subtracted from the total cost of attendance for each person (including tuition and fee charges, room and board or allowance for living costs, books and supplies, transportation to and from school, and other miscellaneous costs). The difference determines financial need, and thus the maximum federal aid for which the family may be eligible. (Some institutions use a separate formula for need based institutional aid.) Some schools guarantee to meet the full financial need of each admitted student; however, most try to do so and may fall short, depending on the availability of funds. Outside scholarships (even non need based) are taken into account in determining the amount of aid eligibility for federal, institutional, and state financial aid programs.

The aid package offered by each school may include one or more of the following resources: Federal Pell Grants, for those with greatest financial need; Federal Supplemental Educational Opportunity Grants, for those with great financial need who are also eligible for Pell Grants; grants from the school; Federal Work Study or other work programs; low interest Perkins loans; and subsidized and unsubsidized Stafford loans. Parents of undergraduates may also apply for a Federal PLUS loan. For unsubsidized Stafford loans and all PLUS loans to parents, need is not a requirement, but students and parents must still complete the FAFSA before eligibility for unsubsidized Stafford loans is determined.

Loans have varying interest rates and other requirements. Repayment of Perkins and Stafford loans does not begin until after graduation; deferments are available under certain circumstances. For PLUS loans, parents must pass a credit check and begin repayment of both principal and interest while the student is still in school.