There has been a lot of speculation recently about how the slowing economy could harm access to student loans. A few lenders have announced that they will stop offering, or originating, new loans — moves that have prompted hearings by both the House and the Senate. Given this uncertainty (and some overly alarmist stories by respected news outlets) its worth saying a few words about what really is, and is not, at risk in the student loan “crisis.” 
 

What’s at Stake?

What is not at risk is federal student loans. The decision by the Pennsylvania Higher Education Assistance Authority, a large lender, to stop offering federal loans received numerous press hits, but it obscures the fact that there are over 2,000 other private lenders still offering loans. Even if large numbers of lenders went under, students would still have two viable options for loans: loans of last resort and the direct loan program

The lender of last resort program is a rarely invoked provisionthat guarantees students will receive loans through a guaranty agency, a middle-man that reinsurances loans for the government, if their loan application has been denied twice. The Direct loan program, meanwhile, involves the U.S. Treasury providing loan funds through the Department of Education. This is in contrast to the Federal Family Education Loan Program (FFELP), in which students get funding through private companies such as Sallie Mae. (Click here for more on the difference between the two programs). Regardless of how students get the loan, their borrower benefits remain exactly the same.
 
So what is at risk? The answer so far appears to be students trying to take out private loans at some for-profit schools. A lot of these are subprime loans given to students at questionable institutions that put a greater emphasis on enrollment figures than teaching quality. This represents an estimated 2 to 3 percent of all borrowers — many of whom are likely to fall in the 50 percent of borrowers who turn to private loans before exhausting the up to $46,000 that students can annually take out in federal loans. 

A number of prominent individuals, such as Secretary of Education Margaret Spellings, Sen. Edward Kennedy (D-MA) and Rep. George Miller (D-CA), have echoed this argument in letters to college presidents.
 

Congressional Action

Then there are the Congressional hearings. Kennedy held his own in Boston on Monday, but it wasn’t available online or on TV. Miller, the chairman of the House Education Committee, also held his own hearing last Friday, but this revealed less about the state of student loans and more about how partisan any issue can become. Despite his previous calm, Miller used the hearing as a chance to badger Spellings and other members of the department about their preparedness for enacting lender of last resort provisions or expanding the direct loan program. This came across more as a chance to skewer a political opponent, rather than genuine concern.

The Republicans on the House Education Committee weren’t much better. Howard “Buck McKeon” (R-CA) mostly ignored the issue of availability after his initial statement, turning the focus instead to a fight over direct vs. FFELP loans (Republicans oppose direct loans, seeing the program as an unnecessary expansion of government).
 

The Big Picture

During all the bluster on student loan availability, there has been one major issue noticeably absent: the cost of college. Students would never need such large loans had the cost of college not increased at such an astronomical rates over the past few decades. It doesn’t help that many states (and the government) have announced plans to slash some higher education funding for the coming year — decisions that will undoubtedly lead to larger tuition bills. Given that federal loans continue to be widely available, perhaps Congress would be better served to stop obsessing over a “crisis” and take action that would reduce the need for loans in the first place.