In Uncertain Times, Colleges Rethink Private Lenders’ Role in Financing Education
LOANS
New London Day
Katie Koch
Boston University Washington News Service
April 23, 2009
WASHINGTON – In the midst of rising tuition, dried-up consumer credit and a grim job market, the University of Connecticut has begun a campaign this spring to let students know that at least one aspect of their finances is secure: their federal student loans.
In December, the university announced it would no longer back students’ federal loans provided by approved lenders, but instead would guarantee only those direct loans from the federal government itself.
Throughout the spring semester, students were bombarded with letters, signs on buses and ads in the Daily Campus student newspaper signaling the change.
Now, as students returning in the fall receive their financial aid packages in the mail, UConn hopes they will find their 2009-10 loan awards—a projected $150 million in total—easier to understand and, ultimately, to pay back.
“We are promoting, promoting, promoting,” Jean Main, director of financial aid at UConn, said of the program. “The response has been positive so far.”
UConn’s switch to the William D. Ford Federal Direct Loan Program, as it is called, is what President Barack Obama’s proposed budget would eventually mandate for all universities as a way to reroute the savings to grants for needy students.
The plan has faced opposition in Congress and from the private banks and state-run nonprofit groups that currently provide government-subsidized loans through the Federal Family Education Loan program.
In light of the financial turmoil of the past two years, however, many colleges, like UConn, are abandoning that program on their own to ensure that their cash-strapped students get the loans they need.
At UConn, the decision to switch to the new direct-loan program was in large part based on recent trends in the student lending markets, Main said.
In 2007, Congress passed the College Cost Reduction and Access Act, which ended many attractive subsidies that provided incentives for private lenders to lend to students.
After the crisis in the capital markets began to spread early in 2008, Main said, lenders started dropping out of the federal program altogether, leaving loan availability for the 2008-09 academic year in limbo.
“We sat back and assessed and said, ‘This is a little volatile for our taste,’ ” Main said. With the new program, “benefits are comparable if not better, and there’s less potential uncertainty.”
Those benefits include lower late fees and interest rates and the option to choose an income-based repayment plan to keep payments manageable, Main said.
The changes would apply to Federal Stafford, Federal Parent Plus and Graduate Plus loans. UConn students borrowed roughly $102.7 million under these programs in 2008, and the number could very well increase, Main said.
A growing trend
UConn isn’t the only university to make the switch voluntarily. Colleges around the country are banking more heavily on increased support from the federal government to help students weather the financial aid storm.
A new survey by the research firm Student Lending Analytics found that 10.7 percent of colleges in the subsidized program are switching to direct federal lending for the 2009-10 academic year and that 15 percent were still considering a switch as of early March.
As a result, the share of federal loans provided through direct lending could grow to 40-45 percent from the 26 percent in the current academic year, the survey estimated.
The trend is spread evenly among public, private and two-year colleges, the study found. Of the financial aid administrators surveyed at each type of institution, 25.7, 27.9 and 27.5 percent are making or considering a switch, respectively.
Schools are switching for a variety of reasons, said Pat Smith, a policy analyst for the American Association of State Colleges and Universities.
“Some of them are just nervous because they read in the paper about the credit markets,” Smith said. “For others, the lenders that they’ve dealt with have said they’re not going to make any more loans. Rather than go out and shop for a new [federally backed] lender, they’ve decided to go that way.”
Smith also attributed the sudden shift to direct lending to the Department of Education’s effort to make switching easy for colleges, whose financial aid processes often involve mounds of paperwork and complex algorithms for calculating aid.
“It uses the basic software approach that the institutions use with the Department of Education in disbursing Pell grants,” Smith said. “Nobody’s complained about it, and the Department of Education’s been responsive.”
Struggling with student need
Colleges’ desire to secure loans for their students is especially critical this year, as institutional aid awards have to be balanced with other pressing financial concerns.
The University of Connecticut faces a $34 million budget deficit for the coming year and has already made $12 million in cuts elsewhere.
The university’s board of trustees voted in March to increase tuition at the main campus by 6 percent, with corresponding increases in housing and fees—$1,150 more for in-state students and $2,038 more for out-of-state students.
While it’s still too early to predict whether a tuition increase coupled economic downturn will increase students’ financial need, Main said. Three-quarters of the student body qualified for some form of assistance for the current academic year, totaling $290 million, and UConn has budgeted a $34 million increase for next year.
“We’ve seen an increase in FAFSA [Free Application for Federal Student Aid] applications, which is an indicator that more people feel like they need aid,” Main said. But “it doesn’t give you any indication of how needy they truly are.”
Private colleges face similar worries. A December 2008 study by the National Association of Independent Colleges and Universities found that 87 percent of college presidents surveyed were greatly or moderately concerned about securing enough student loan availability.
All but 2 percent said a $500 increase in Pell grants or any increase in federal student loan limits would be helpful as they struggle during tough economic times.
Connecticut College, a private college in New London, has increased its financial aid budget by $1.5 million this year to accommodate an uptick in need, according to Elaine Solinga, the college’s director of financial aid.
“The economy has had a major impact on how our families can pay for college,” Solinga said. “Their home equity that they had used in the past has declined… and they’ve seen their retirement portfolio decline in value, so they’re very nervous about the whole process.”
Mitchell College in New London has seen an increase in the number of families requesting that their 2009 income rather than 2008 be considered to determine their financial aid awards for next year, according to Renee Fournier, a spokeswoman for the small private college.
“We have prioritized our award decisions for our current students and families who have been adversely affected by the downturn in the economy,” she said.
In addition, Connecticut, like other states, has struggled to find money for financial aid in its strained budget.
In her proposed 2010-11 budget, Gov. M. Jodi Rell has proposed freezing the amount of money for state-financed aid programs, such as the Capitol Scholarship, Connecticut Aid for Public College Students and the Connecticut Independent College Student Grant program.
A federal solution
With states and schools cutting back, President Barack Obama in his budget has proposed sweeping changes in federal student assistance that would greatly increase the federal government’s role in how students borrow and manage their debt.
Most notably, his plan would increase Pell Grant awards, which do not have to be repaid, by ending the federal subsidy program, which has provided more than $600 billion in subsidized education loans since it began in 1965.
This would save more than $4 billion a year, according to the Congressional Budget Office, and would allow the government to make Pell grant spending mandatory, rather than set by Congress.
Congress increased the maximum Pell grant award by $619, raising it to $5,350 for the coming academic year as part of the stimulus package it passed earlier this year. If Obama’s plan passes, Pell grant awards will be priced to increase with inflation—something many higher education advocacy groups applaud.
“There’s a marked difference between what Pell grants used to provide to low-income students who don’t have the resources”—77 percent of the cost of attendance in the late 1970s—and now, when they cover only 35 percent, said Jeffrey Czerwiec, the UConn campus organizer for the Connecticut Public Interest Research Group.
“We’re thinking if we can increase Pell grants we can increase access” to higher education, Czerwiec said.
But lenders and the organizations that represent them are gearing up to fight the president’s proposal.
Brett Lief, president of the National Council of Higher Education Loan Programs, said the $4 billion in savings the White House projects for the switch is not as ideal as it sounds. The government would benefit from students paying off loans, which carry higher interest rates, especially since Treasury interest rates are currently so low.
“They’re having Peter and Pauline pay for the Pell grant increases,” Lief said. “The savings that come from the program result from the fact that [the student] would be paying it off.”
Rep. Joe Courtney, D-2nd District, who supports Obama’s plan, said Congress must balance priorities in paying for higher education and that, in his view, increases to grants should come first.
“It’s really important to try to diminish the size of debt financing that students have to rely on,” he said.
According to Courtney, the savings from eliminating the subsidized loan program are a practical necessity.
“The president’s proposal… at a basic level is about trying to more efficiently allocate higher-education dollars,” Courtney said. “These needs, whether it’s grants, loans or repayment, [are] going to be expensive.”
Critics also warn that while students may have more stable access to loans under a direct-lending program, the quality of financial services, from financial literacy classes to debt management counseling, would decrease.
“If you switch to the government, you lose that kind of personal touch,” said Krista Cole, a spokeswoman for the Education Finance Council, which represents lenders. “Instead of calling the local provider, you’re going to have to call the government.”
Lief acknowledged that many colleges are leaving the subsidized loan program and said that the volume of loans distributed through the direct federal program may double in the next academic year.
But he warned that relying so heavily on the government will decrease competition in the lending market, stifling affordable loan options down the road when the economy recovers.
“I certainly understand and respect schools like UConn, but they need to just keep both eyes open,” he said. “Nothing works forever.”
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