The Department of Education recently proposed policies that detail how it will implement the new Income Based Repayment (IBR) and Public Service Loan Forgiveness Programs created through the College Cost Reduction and Access Act last year. These programs will limit monthly payments to manageable percentage of a borrower’s income, and forgive student loans for borrowers who choose a career in public service (click here to learn more).

While most of what the Department of Education has proposed is good, the proposed policies include two unnecessary and costly obstacles for borrowers. Borrowers interested in Public Service Loan Forgiveness would be left in the dark for years on whether their jobs count as eligible public service, and in IBR, some married borrowers would have to pay twice as much on their monthly payments.

Let ED know that they should remove these obstacles – take action now!

Dont forget to check out our Action Alerts Page to make your voice heard on other issues that matter! 

There’s an interesting story in the New York Times today about how some student loan companies have stopped offering loans to some students at community colleges and “other less competitive institutions.”

At face value, the move appears to be an ongoing reaction to the effects of the credit crunch on the student loan market, a topic both Kay and Pedro  have written about. Essentially, a worldwide lack of people and institutions willing to lend money raised the cost of borrowing for loan companies to the point where the guaranteed return they received from the government was insufficient for the loans to be profitable. As a result, some lenders have stopped offering federally-guaranteed student loans, in which the government pays up to 97 percent of the value of a defaulted loan and gives the lenders a quarterly subsidy known as a special allowance payment.

Given that loans already appear to be turning smaller profits, the decision to stop lending to schools where students are more likely to default on their debt makes sense from a pure capitalistic standpoint.

But the federal student loan market is far from a free market enterprise. As mentioned above, lenders are given governmental subsidies to make the loan and stand to lose no more than 3 percent of the loan. In addition, under a plan unveiled by the Department of Education on May 21, lenders will now also be able to receive a low-interest government loan to help stay in the market.

So what are lenders doing with this governmentally-subsidized money? Not putting it toward the neediest students who are most likely to require financial assistance in going to college, and also the most likely to drop out if faced with too many hurdles.

The fact that companies can take government money and then essentially redline low-income students suggests that perhaps an incentive should be introduced that lenders hoping to take advantage of these funds cannot dramatically adjust the schools they are willing to serve.

While what the loan companies are doing may appear immoral, it is not illegal. It does, however, both expose a major flaw in the federally guaranteed student loan market and raise questions about the actions and motivations of the schools that are getting passed over.

First, let’s consider the school’s motivation. If there are concerns about finding lenders to offer loans, why don’t these institutions take the obvious step of at least applying to join the Direct Loan program? Direct Loans are dispersed by the Department of Education using U.S. Treasury funds. Because the money comes straight from the government, any school in the program will always be able to get loans so long as it continues to meet eligibility requirements. The article doesn’t address whether these schools are considering switching, but it certainly seems that if colleges really have their charges’ best interest in mind they would at least entertain the idea.

Finally, the decision by loan companies to be more selective institutionally exposes an inherent flaw in the federally guaranteed student loan market: the loans are an entitlement for students, but no lender is required to make them. Congress sets the subsidy rate for lenders and hopes it’s sufficient to get companies to make loans. But as the Times article shows, what could be enough for loans at one type of school may not work elsewhere. Creating a system where companies bid with one another for the lowest subsidy at which they will make loans to all students in a given state or region would at least ensure that certain schools couldn’t get bypassed.

As you have probably heard by now, the “credit crunch” has been making the student loan market less lucrative for many lenders, and has caused a bit of a controversy in the world of higher education.

To recap – lenders are trying to argue that problems in the credit markets will lead to a crisis for students who need loans to attend school, while most others think that the affects for most students will be small. Congress and the Education Department have created new policies to make sure that, no matter what happens, students will be able to access financial aid, but lenders, who already receive government subsidies to make loans to students, keep pushing to get a sweeter deal for their bottom line (as opposed to sweeter deals for students or taxpayers).

I thought this new article in the Chronicle of Higher Education might help point to the difference between planning for the worst (good), and unnecessarily wasting taxpayer money (not so good):

The Quick and the Ed has  a good post today taking apart a letter to the editor where Kevin Bruns, the executive director of America’s Student Loan Providers, pouts about a recent Washington Post editorial about direct loans.

An article in the Minneapolis Star Tribune last week looked at how students in Minnesota might be affected now that student loans are starting to dry up. The article reports that the average student that attends college in Minnesota college carries a debt load of $23,375 -- that's higher than the national average.

The article says not to worry, however:

"There may be fewer lenders, but I'm not in a panic," said Jane Williams, director of financial aid at Concordia. "We still think there are plenty of loans out there. I don't think it's necessary for families to be worried."

Oh good. There are still plenty of lenders out there.

As you have probably heard, we are going through some rocky financial times. A “credit-crunch” fueled recession means that many financial institutions will have a harder time making ends meet, and this, of course, includes student loan companies, as the Washington Post points out today.

Higher education advocates are worried that these lenders are exaggerating the effects of the crisis on the student loan industry as a way to secure unneeded bailouts and get back some of the wasteful subsidies that Congress cut last year in order to increase student aid. They are also worried that all of the hype will mean debt-averse students may be discouraged from “investing” in a college education. Don’t worry – it is very unlikely that you won’t be able to get the loans you need to finance you education.

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.

The Center for American Progress and Campus Progress are pleased with today’s passage by the House of Representatives of the College Opportunity and Affordability Act (H.R. 4137). This legislation continues to build on Congress’s commitment to making college more affordable and ensuring that Americans are prepared to compete in an increasingly knowledge-based economy. 

An amendment has been introduced that would give important protections to private student loan borrowers.

Since student loan companies lobbied their way into the Bankruptcy Bill in 2005, borrowers have been virtually unable to discharge private student loans through bankruptcy. Instead of treating these loans like credit cards or any other form of consumer debt, they are treated more like a criminal fine. This leaves borrowers few ways to deal with what are often high-cost loans if they run into financial troubles.

Later this week, the House of Representatives is taking up its version of the reauthorization of the Higher Education Act - the law that governs almost every federal program and policy towards higher education. We have a chance, if we act fast, to change this situation. Rep. Danny Davis proposed an amendment that would extend bankruptcy protections to private loan borrowers. 

Please urge your representative to support the Davis Amendment

So there's a site that actually allows students to download their textbooks, and print them out, for free (I guess you pay the cost of printing).  Wish I would've had this in undergrad. I loathed my undergrad bookstores for paying me 50 cents for buying back books I paid over $150 for (until I discovered the joy of selling books online).

I especially like their slogan: Liberating textbooks and study aids for students of all financial backgrounds.

The price of books, when compared with the rising costs of tuition (as CP's college affordability campaign can tell you more about), could be considered small, but when you're paying that $600/semester on books out of your student loans, every penny helps.

Speaker Pelosi held an event at the Capitol yesterday to sign and send to the President very important legislation to make college more affordable.  Here's an excellent quality cell phone shot of the Speaker, Senator Ted Kennedy, Rep. George Miller, Rep. Joe Courtney, and others -- all leaders in this effort to stop the shameful government handout to lenders and use the money to help students afford college. There’s also video of the event. 

 None of this would gave happened without the efforts of young people, through Campus Progress's Debt Hits Hard Campaign, through our Campaign for College Affordability coalition, and other efforts, to demand change.  The efforts of New York State Attorney General Andrew Cuomo, a number of journalists, our own Pedro de la Torre, and others to investigate and expose bad practices and shady dealings between lenders and financial aid offices were also critical. 

The work is by no means done.  College is still out of reach for far too many young people.  One area that needs reform now is private loans, the ones not guaranteed by the government.  Lenders need to present clearer information to students about loan terms – and about the fact that students are better off obtaining all the federally guaranteed loans they can before seeking private loans. 

Right now you can weigh in on this debate, expose more bad behavior, good behavior, or other key facts about financial aid and the loan industry, get your work noticed, and potentially win $2500 to pay tuition or pay off student loans.  It’s our College Affordability Essay Contest – deadline October 29.  Enter now!

Not those head-in-the-clouds Democrats. It's Republicans, who adopted the student loan "industry" in its infancy, like a stray cat, and have nurtured it and protected it ever since. There actually is a parallel student loan program that does use government funds. It was started in the early days of the Clinton administration. It costs less to operate, and it has not been tainted by scandal. But when the Republicans regained control of Congress in 1994, they pushed through a law forbidding the Education Department to encourage the use of this program. As a result, direct federal loans account for only 25 percent of all student loans.        

Lindsey Luebchow* points out that one college, profiled in Inside Higher Ed recently, proved that one-on-one counciling can help reduce student debt, and it's actually possible to pull it off:

As the Barnard [College] example shows, proactive counseling can go a long way in preventing students from making bad decisions that will haunt them well after they leave college. But are similiar efforts feasible at larger universities with enrollments that exceed Barnard's 2,400 students? 

The answer is "yes"—at least at Colorado State University, which enrolls more than 20,000 undergraduates and about 4,000 additional graduate students. For more than a decade, financial aid administrators at the university, which participates in the federal Direct Loan program, have been concerned about students unnecessarily taking out non-federally guaranteed, private loans. And they have been doing something about it.

As a school that is about 10 times as large as Barnard, Colorado State officials realized that they didn't have the capacity to contact each and every borrower who applied for a private student loan. Instead, they decided that they would target private loan applicants who have not exhausted their federal loan eligibility. When private loan applications come in, the financial aid office flags students who either have not filled out a FAFSA or already have federal loans but still have eligibility remaining.

*I accidentally originally credited this post to Sara Mead.

Via the Chronicle. It appears that in the latest development on student loans that students are more likely to sign on with devastatingly higher loan rates with private firms rather than fill out the (roughly) 20-page long federal aid form which offers lower rates. This is unsurprising to me. I remember filling out that form. It was painful, to say the least, and when private firms are offering forms where more or less all you have to provide is your social security number and your parents' address.

We all cheered last week when the House passed the College Cost Reduction Act, the largest increase in student aid since the G.I. Bill. The talking points should sound familiar by now: the bill would make college more accessible and affordable by increasing need-based grant aid, cutting interest rates in half on Stafford loans, and expanding loan forgiveness. The best part: this would all come at no added cost to taxpayers, since the bill’s benefits would be funded by cutting excessive government subsidies to corporate lenders, who were fattening their wallets on the backs of debt-ridden students.

USC’s financial aid director is stepping down after allegations that she violated the school’s conflict of interest policies when she bought stock in Student Loan Xpress. The news of Catherine Thomas’ departure after 17 years on the job comes less than two weeks after Columbia fired its finaid director David Charlow for his ties to the same company.

It seems like things keep getting worse for eager lenders and corrupt university officials involved in the student loan kickback scandals popping up around the country. Sensing this trend, Alabama Contract Sales (a lending company founded by a state representative) ‘fessed up yesterday to federal prosecutors that it had given $83,000 to Roy Johnson, the former chancellor of Alabama’s two-year college system. It only gets juicier with a report in the Birmingham News today that $7,500 of the kickbacks went to an unsuccessful campaign for the Hunstville, Ala. mayoralty. Two birds with one stone! This news will hopefully add some fuel to the trend of lenders coming forward for playing a little I’ll-scratch-yours-if-you-scratch-mine. 

With student lenders facing massive proposed cuts in subsidies from Congress, Sallie Mae is playing a particularly nasty game of racial politics to maintain its privileged standing.