Posts with the tag credit crunch

Lenders Are Avoiding Giving Loans to Low-Income Students

Ben Miller — Mon, 02 Jun 2008 23:15:49 EDT

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.

Something for Nothing: More on the Pseudo-Student-Loan Crisis

pdelatorre — Mon, 19 May 2008 11:52:17 EDT

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):

Student Loan Providers Want More Easy Money

pdelatorre — Wed, 14 May 2008 11:27:11 EDT

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.

Credit Crunch and Student Loans

pdelatorre — Thu, 10 Apr 2008 13:59:08 EDT

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.