Student Loan Blog : Education Department

Students Could Wave Goodbye to Merit–Based Federal Aid

Student Loan Girl — Thu, 25 Jun 2009 16:41:00 GMT

In another move to restructure the federal financial aid system, President Obama has proposed ending the government’s five-year foray into merit-based student aid and redirecting those financial aid funds to the need-based Pell Grant program, reports The Chronicle of Higher Education (“An Experiment in Merit-Based Student Aid Is Likely to End,” June 26, 2009).

The Academic Competitiveness Grant and the National Science and Mathematics Access to Retain Talent Grant programs were created by Congress in 2006 to encourage students to take academically “rigorous” coursework in high school and then choose college majors in fields with labor shortages.

Only students who are eligible for need-based Pell Grants can qualify for the Academic Competitiveness Grants, which provide $750 and $1,300 to college freshmen and sophomores respectively, and for the SMART grants, which provide $4,000 to college juniors and seniors who major in science, math, and certain foreign languages.

But so far both grant programs have fallen short of their participation projections, due in large part to the Department of Education’s failure to promote the programs, as reported by the department’s own inspector general in 2008.

The other major problem has been the programs’ vague qualification criteria, which has made it difficult for financial aid officers’ to determine award recipients. The American Council on Education, in a 2006 letter to the Department of Education, called the grant program’s guidelines “unworkable” and defined them as placing a “breathtaking administrative burden” on colleges’ financial aid officers.

Obama’s Proposal Receives Support From Education Officials

Education Department officials support the president’s proposal to make the Pell program an entitlement with annual increases tied to inflation and to raise the maximum Pell awards by $200 to $5,500 by the 2010–11 academic year because, they say, the Pell Grant program better serves low-income students than the competitiveness grant programs.

This proposal “would benefit the vast majority of the nearly six million Pell Grant recipients worldwide,” even though the annual increases amount to significantly less funding for the one in 10 students who qualify for the Academic Competitiveness and SMART grants.

Even former Secretary of Education Margaret Spellings, who crafted the merit-based programs under the Bush administration, backs the proposal.

“Do higher education officials and K-12 officials prefer free money with no strings attached? Absolutely,” Spellings said. “But if we’re trying to move the needle, putting resources behind our policy goals is a more powerful and prudent way to go."

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FAFSA Discourages Students From Applying for Federal Loans

Student Loan Girl — Wed, 10 Jun 2009 21:10:00 GMT

A large proportion of students who only take out non-federal private student loans to finance their education aren’t applying for federal financial aid at all, and it’s the application itself that may be culprit, a new study suggests (“Nightmare Application May Be Driving Students to Costly Loans,” Forbes, June 9, 2009).

In his study of 250,000 students, Mark Kantrowitz, publisher of FinAid.org, a website that offers information on financial aid and student loans, found that since 1999, among those students who relied exclusively on private student loans, 60 percent of undergraduates and nearly 90 percent of graduate students didn’t complete the FAFSA, the Free Application for Federal Student Aid.

The number of students who only take out private student loans has increased 27 percent over the last 10 years. Between 2007 and 2008, the private loans taken out by students who forwent their federal financial aid options amounted to $6.2 billion — nearly 30 percent of the $22.5 billion in new private student loans originated that year.

Proposed Changes Would Eliminate FAFSA

The study’s findings come at a pivotal time in the FAFSA’s history, as the U.S. Department of Education weighs two proposals to overhaul the federal financial aid application process, one of which would carry out President Obama’s campaign promise to eliminate the FAFSA completely.

The FAFSA — currently the only way for families to apply for federal financial aid for college and graduate school — advertises itself as requiring only one hour to complete. But the six-page application calls for families to provide information about their adjusted gross income, marital status, value of their personal property, and taxable income — hurdles, Kantrowitz says, that “may deter students from applying for federal aid.”

A revamp of the FAFSA or of the application process itself could encourage more students to apply for federal student loans, which are typically less costly than private student loans, generally offering lower, fixed interest rates and more flexible repayment terms.

One proposal being considered would simplify the financial aid application form to require only adjusted gross income figures and tax exemption numbers. The other plan that’s been suggested would eliminate an application form altogether and allow the Internal Revenue Service to pass on information from financial aid applicants’ tax returns directly to the Department of Education.

Kantrowitz says a change in the financial aid application process may, in particular, help students from low-income families. His study found that low-income students have been more likely to end up turning to private student loans, which will generally cost them more than federal college loans would: Students from families who earn less than $50,000 a year accounted for two-thirds of those borrowers who financed their education solely with private loans.

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The Plot Thickens for the Future of Student Lending

Student Loan Girl — Tue, 14 Apr 2009 00:00:00 GMT

It’s “all hands on deck” for federal student loan lenders. The banks and third-party student loan providers that make up the Federal Family Education Loan Program have made it abundantly clear that they’re not going to roll over and accept the terms of the Obama administration’s proposal to axe their loan program in favor of the Education Department’s Direct Loan Program without a fight, The New York Times reports (“Plan to Change Student Lending Sets Up a Fight,” April 12, 2009)

“We can either meet or beat the budget savings that are in the president’s budget with the exact same system that we have got working now with maybe a few tweaks,” said Albert Lord, chief executive of Sallie Mae, the largest student loan provider participating in the FFEL program.

According to Congressional Budget Office calculations, establishing the Direct Loan Program as the sole provider of federal student loans is projected to save the government $94 billion over the next 10 years, savings that President Obama has said would be funneled directly into the federal Pell Grant Program for low-income students.

Lender-Proposed Alternatives Come Up Short

Lord and other FFELP lenders who oppose the administration’s plan are pushing for a compromise between the Obama plan and the current system that would allow them to continue offering students valuable lending services — quality customer relations, billing, and default prevention and collection — and still achieve Obama’s goal of saving taxpayers money.

FFELP lenders say such dually-beneficial partnerships are possible, which can be evidenced by a compromise that Congress approved last year that allows FFELP lenders to originate student loans using federal money and to resell the loans back to the government. FFELP lenders, which provide more than $56 billion of the nation’s federal student loans, were able to continue making loans to families and the government was able to ensure that families still had access to federal student loans.

But the savings Sallie Mae projects under its compromise plan still only add up to about 82 percent of the president’s savings goal over the next five years.

Supporters of the president’s plan say that this savings shortfall, as well as the fact that FFELP lenders are still relying on the government’s help to retain lending capital, raises the question, “why do we even need private lenders,” asked Representative Timothy Bishop, D–N.Y., a former provost of Southampton College.

Bishop argues that expanding the Direct Loan Program, which provides federal student loan funds directly to more than 1,500 schools is “obvious and long overdue,” being that over the last few decades private lenders have earned huge profits at relatively no risk because the government guarantees repayment up to 97 percent.

Factional In-Fighting Could Favor Lenders

In addition to battling lenders, lawmakers are also fighting an internal battle. Republicans say Obama’s plan is just another means to expand government control over the private sector, while Democrats are divided, with some legislators favoring the plan while others, who represent districts that rely heavily on student loan providers for employment, are siding with private lenders.

Allen Boyd, D–Fla., argues that the president’s proposal could jeopardize thousands of jobs across the country, including 650 in his own district, at a time when unemployment is already rampant. And the states that administer loans through state-based guarantee agencies, considered quasi-government entities that benefit the same as private lenders, are fighting to retain their lending business.

To help keep these quasi-government agencies afloat if they lose their FFELP business, the Obama administration has proposed spending $500 million a year on these agencies’ financial literacy programs and services.

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Despite Down Economy, College Student Aid Still Thriving

Student Loan Girl — Tue, 24 Mar 2009 00:18:00 GMT

In economic downturns, colleges and universities become flooded with students of all ages looking to better prepare themselves for an increasingly competitive job market. But these schools haven’t been immune to the effects of today’s recession.

Fortunately, for every recent economic downturn in higher education — tuition hikes, state budget cuts, scholarship and grant cutbacks, and a fluctuating student loan market — there’s also been a tangible upside (“Glimmer of Hope for Student Aid in a Bad Economy,” USA Today, March 19, 2009).

Tuition Assistance

Downside: Public colleges have increased tuition by 4 percent per year over the past 10 years, and many schools are set to bump up tuition even more this year as they face unprecedented state budget cuts.

Upside: Federal stimulus money should help some public colleges to better cope with the loss of state funding and to minimize any increases in tuition. The state of Maryland is hoping to go a fourth-straight year without in-state tuition increases. Other colleges are offering one-time deals to students; Kent State University in Ohio is offering laid-off workers a one-time tuition and application waiver at its Trumbull campus, and Manchester College in Georgia is offering to refund one year of tuition for students who aren’t able to secure a job or admission to grad school within six months after graduation.

Institutional Aid

Downside: Trouble in the stock market has caused colleges’ endowments to drop 25 percent in value this year, which has severely hampered schools’ ability to offer scholarships.

Upside: Despite their endowment losses, more than 90 percent of the nation’s private colleges and universities will be increasing financial aid next year by 9.8 percent to make up for 4-percent tuition increases, according to the National Association of Independent Colleges and Universities.

Government Grants

Downside: Aid for merit scholarships has taken one of the biggest hits this year, primarily due to state budget cuts.

Upside: The federal stimulus package has increased the maximum award for Pell Grants — federal financial aid for low-income students — from $4,731 to $5,350 for the coming academic year and to $5,500 for the 2010–2011 academic year. And, an additional 800,000 students are expected to receive Pell Grant funding this year.

Federal Student Loan Programs

Downside: The $50 billion Federal Family Education Loan Program — the government program that provides federal student loans to more than 10 million students through third-party lenders — has been the larger of the two federal student loan programs. But over the past two years, the FFEL program has lost business to the Direct Loan Program, the government’s other federal student loan program through which the U.S. Department of Education provides federal student loans directly to families, as hundreds of cash-strapped FFELP lenders have been forced to exit the program.

Upside: The FFEL program has still managed to increase its student loan volume this year, and some lenders are returning to the student loan market now that the federal government has bought nearly $25 billion in lenders’ student loan securities, providing them with the capital to make new loans. The Direct Loan Program has picked up the slack, providing an additional $7 billion in lending this year.

Private Student Loans

Downside: The overall supply of capital for private student loans is estimated to have decreased by one-third — a decrease of between $6 billion and $7 billion — due in large part to the fact that lenders have made it harder for families to qualify for private student loans.

Upside: Increased government funding for federal Stafford student loans has helped to reduce students’ reliance on private student loans. And more students are maxing out their federal financial aid before turning to private student loans, which the USA Today suggests has helped students avoid over-borrowing in private student loans.

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Note to Families: Financial Aid More Competitive, But Not Out of Reach

Student Loan Girl — Tue, 27 Jan 2009 00:09:00 GMT

With more families applying for financial aid — applications are already up 10 percent above last year’s record — and lending for private student loans drying up, families’ ability to find available financial aid is becoming more difficult, reports the Associated Press (“College Financial Aid System Facing Stiff Test,” Jan. 25, 2009).

Traditional sources of college funding are no longer available: Home values are dropping, making it difficult for families to get a home equity loan, college savings accounts are dwindling, and private lenders are leaving the student loan market.

Currently, only 21 of the 60 third-party student loan lenders who issued $19 billion in federal and private student loans last year are still lending, and most of the lenders still issuing loans have severely tightened their credit criteria, according to Finaid.org, a college funding resource site.

Families face limited financial aid options at a time when state funding shortages have forced numerous state colleges to cut their financial aid budgets and replace grants and scholarships with student loans in their financial aid offers. Colleges are also increasing tuition, in some cases, by double digits.

“There are no sure answers because we’re in new territory,” said Bruce Hammond, a college admissions consultant based in Washington, D.C. “But students with high need and lesser credentials are going to have to brace themselves for less aid.”

Financially Needy Students Should Know Their College Funding Options

While the financial atmosphere for college students and their families may seem more dismal this year, things “are not as scary as people might think,” says Lauren Asher of the non-profit California-based Institute for College Access and Success.

Students and parents can take advantage of expanded federal financial aid offers. The U.S. Department of Education has already made $95 billion in grants, loans, and work-study assistance available to nearly 11 million students and families and Congress has increased annual borrowing limits for unsubsidized Stafford student loans, which are not tied to financial need, by $2,000. And President Obama’s proposed stimulus package could offer families even more financial aid.

Cash-strapped families and students could consider attending lower-cost public schools and community colleges to avoid taking on large amounts of debt. On average, tuition and fees at a two-year public school cost about $2,300, while tuition and fees at a four-year public school cost about $6,000, according to the College Board.

And while a number of the nation’s top colleges and universities, including Harvard , Yale, and Duke, have seen their endowments take a huge hit this year, none of these schools have gone back on their commitment to offset their high tuition costs by extending financial aid offers to a greater number of low- and middle-income families.

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Univ. of Phoenix Accused of Manipulating Its Default Rate

Student Loan Girl — Wed, 14 Jan 2009 23:39:00 GMT

Three former University of Phoenix students are suing the for-profit higher education giant for using a questionable loan repayment practice that skews the university’s default rate and takes away federal student loan repayment options from students who withdraw from the school, according to The Chronicle of Higher Education (“Lawsuit Accuses U. of Phoenix of Protecting Its Default Rate at Students’ Expense,” Jan. 14, 2009).

The lawsuit, which could soon reach class-action status, alleges that the university’s ”payback” policy is designed to manipulate the school’s default rate — the percentage of a school’s students who stop repaying their loans. Under the current policy, the school “pays off” students’ federal college loans without students’ knowledge or consent after they have withdrawn from the institution. The University of Phoenix then attempts to improperly collect on the paid-off loans directly from the students “under terms more onerous than those of the original federally guaranteed loans.”

By canceling the federal student loan debt of students who withdraw from the school, the University of Phoenix, which has one of the lowest default rates among the nation’s for-profit colleges, effectively prevents those loans from being considered in its default rate.

Statistics suggest that students who withdraw from school are more likely to default on their student loans, and the more borrowers a school has who go into default thereby increasing its default rate, the more likely the school is to lose its ability to participate in the federal student loan program, among other restrictions.

Students Lose Repayment Benefits Under ‘Payback’ Policy

According to the lawsuit, the university’s payback policy harms students by preventing them from being able to take advantage of generous loan repayment terms offered by the federal student loan program, which include below-market interest rates and longer repayment terms and grace periods.

Students who must repay the University of Phoenix directly are “routinely bombarded with calls, letters, and e-mails from [the university] to collect tuition along with threats that refusal to pay will result in referral to collection agencies and negative reports on their credit.”

The lawsuit seeks actual and punitive damages on behalf of thousands of borrowers affected by the university’s repayment practice over the past four years, as well as an injunction barring the university from continuing its current payback practice, which could affect numerous other for-profit colleges that use similar practices, the Chronicle reports.

In a statement, the University of Phoenix said that the students bringing the lawsuit have “misconstrued” the Higher Education Act, and that the U.S. Department of Education had determined in January 2008 that the school’s refund policies were compliant with federal student aid rules.

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Student Loan Default Rates In Nevada Rank Among Top In Nation

Student Loan Girl — Mon, 08 Dec 2008 11:55:00 GMT

After ranking number one in the nation for student loan defaults for the last four years, Nevada managed to come in fifth this year with a 7.4-percent default rate based on the Education Department’s data for borrowers who began repaying their loans between October 2005, and September 2006.

To combat the state’s consistently high default rate, state colleges have spent the last six years reaching out to Nevada’s federal student loan borrowers who are late on their payments before they default on their loans, said Sharon Wurm, director of financial aid for Nevada’s public college system (“Nevada’s Rate of Default on College Loans Among Highest In The Nation,” Las Vegas Sun, Nov. 30, 2008).

Because Wurm has found that students feel more comfortable discussing their student loan repayment options with their school than with their lender, her office now contacts borrowers by email, ground mail, and telephone to discuss ways students can avert default, such as economic hardship deferments and forbearances. These options allow students to temporarily stop making payments or make reduced payments on their loans.

“[Nevada’s recent ranking] validates all the hard work that the institutions are doing,” Wurm said.

State Lacks Student Loan Default Demographic Data

While Nevada’s outreach initiative may be helping to improve the state’s default rate, Wurm said the state has limited data on the types of students that typically default and the reasons why so many college students continue to default.

One reason, Wurm suspects, may be the state’s low graduation rate. Currently, just 13 percent of Nevada students graduate from the public college system.

In general, students who attend two-year colleges or for-profit schools that offer certificates tend to have higher default rates because they more frequently drop out of school and typically graduate with lower earning potential than students who graduate from four-year institutions.

At the Las Vegas campus of Kaplan College, a for-profit institute offering one-year programs for medical insurance coding and billing 90 percent of students take out student loans, but about 60 percent of students drop out before graduation and 18.9 percent default on their loans.

The College of Southern Nevada, which only has a 4-percent default rate, has been working to improve its retention rate by contacting students when spotty attendance — one of the most common reasons why students do poorly in their classes — first starts to become a problem. The school’s program directors attempt to contact students by phone, ground mail, or via text message, which has helped absenteeism at the school drop by 13 percent since July 2007.

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Debt Collection Agency Adding Hundreds of Jobs

Student Loan Girl — Tue, 18 Nov 2008 17:21:00 GMT

Premiere Credit of North America, a debt collection agency based in Indianapolis, is a bit of an anomaly in today’s down economy — it is thriving at a time when many businesses are cutting back their workforces and many debt collection agencies are losing money to cash-strapped consumers who can’t pay up.

Premiere Credit, which specializes in collecting unpaid student loans and government debt, has been performing so well that it’s looking to add nearly 300 employees to its 250-person staff, reports Erika Smith of The Indianapolis Star (“Debt Collector Premiere Credit to Expand, Add 300 Jobs,” Nov. 13, 2008).

To accommodate its growing business, Premiere Credit is also preparing for a $4 million expansion of its headquarters and is planning to open a second operations center (“Indianapolis Debt Collection Firm to Expand,” Chicago Tribune, Nov. 12, 2008).

The company, which manages more than 700,000 accounts valued at more than $1 billion, is scheduled to receive about $2.5 million in performance-based tax credits from the state, as well as up to $200,000 in training grants.

Student Loans Make Up 40% of Company’s Debt-Collection Business

Premiere Credit CEO David Hoeft attributes the company’s growth to its four-year contract with the U.S. Department of Education, which currently accounts for 40 percent of its business. While the number of delinquent college loans isn’t growing — the student loan default rate has remained steady at 5 percent over the last few years — Premiere has snagged a greater proportion of collection work, Hoeft said, and, with the help of an expansion to its Education Department contract, Premiere’s student loan debt collection business is expected to grow even more.

Debt collectors have a much easier time collecting government-backed student loans than unsecured debts like credit cards, which are not tied to an asset. Federal student loans can forcibly be repaid in a number of different ways and debt collectors have more legal leeway to track down debtors.

“There’s no statute of limitations on collection efforts. [Federal student loans], more often than not, can’t be discharged in a bankruptcy,” Smith writes. “Collection agents can garnish wages, tax refunds and Social Security payments, and they can access a federal database of new hires that makes it easier to find employed people who can pay.”

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Student Loan Providers Get More Help From the Government

Student Loan Girl — Thu, 13 Nov 2008 22:39:00 GMT

In a move intended to avoid a shortfall in student loans next year, Congress has expanded the government program to buy federally guaranteed student loans from private lenders.

Under the updated loan-purchase plan, the Education Department can now buy lenders’ student loans with origination dates between Oct. 1, 2003, and July 1, 2009, The New York Times reports (“U.S. Buying More Loans to Students,” Nov. 8, 2008). The original buyback parameters only allowed lenders to purchase loans made for the current academic year and for the 2009–10 academic year.

Federal officials say that as much as $60 billion in student loans may be eligible for purchase under the new expansion.

“We were able to provide stable, reliable funding for students this school year,” said Education Secretary Margaret Spellings. Now the government is taking action to avoid problems in student loans for next year, she said.

Expanded Program May Solve Liquidity Problem

Many lenders were initially unable to participate in the student loan buyback program because the original version of the program only allowed lenders to sell loans on the secondary market that were generated prior to 2008.

The economic conditions during the current academic year have made it difficult for lenders to secure the financing needed to make new student loans that would be eligible for sale through the buyback program. Unable to sell their loans, lenders were then forced to carry their loans on their books.

“They have these government-guaranteed loans and nobody wants to fund them,” said Sameer Gokhale, a financial analyst for Keefe, Bruyette & Woods in New York. “The government is agreeing to buy more of the loans to give more liquidity.”

The Education Department hopes that the new initiative will provide lenders with the required funds to generate new federal and private loans next year, as lenders may be more likely to participate in the program once they can free up billions of dollars in loans under the new requirements of the buyback program.

“We need to do everything we can to prevent students from becoming the next victims of the financial crisis,” said Sen. Edward Kennedy, chairman of the Senate Education Committee. “Next year, we need to take a closer look at these programs to insulate them from fluctuations in the market so students’ ability to access loans is not threatened.”

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Changes to Student Loan Repayment Programs Not Enough, Advocates Say

Student Loan Girl — Thu, 30 Oct 2008 18:34:00 GMT

Despite 1,500 individuals and a dozen national organizations pushing for further changes to legislative provisions that help low-income college students repay their student loans, the Education Department recently issued the provisions’ final regulations without first making modifications to problematic language (“Low-Income Student Borrowers May Miss Some Intended Benefits,” The Chronicle of Higher Education, Oct. 26, 2008).

One issue involves the rules of a new student loan forgiveness program that would allow college graduates to have their federal loans forgiven in return for at least 10 years of public service in specific professions. Advocates of the program say that language in the program’s regulations fail to establish procedures that would inform college graduates ahead of time about which specific positions qualify for loan forgiveness.

Robert Shireman, executive director of The Project on Student Debt, a California-based advocacy group, believes that there may still be a way for the Department of Education to resolve this issue without having to backtrack through the regulatory process.

Education Department spokeswoman Samara Yudof, on the other hand, says that regulations for the loan forgiveness program “are clear, and provide a broad list of eligible occupations.” Department officials prefer to identify the eligible occupations in paperwork they give to applicants, instead of detailing the occupations within the regulations themselves, she says.

The other major regulatory issue creates a “double-counting penalty” for married couples under a new income-based repayment plan for student loans. If both partners are eligible for income-based repayment and they file joint income tax returns, supporters of the program say, the regulation’s language could be interpreted in such a way that the couple’s total joint income would be used to determine how much each spouse pays individually. This “double- counting” effect may require them to pay twice as much as two unmarried borrowers in similar financial circumstances.

“This is obviously unfair and inappropriate,” Shireman said, “and needs to be changed by Congress.” Yudof concedes that, in this case, Congress may need to take action to resolve the “double-counting” penalty problem.

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State Approves $50-Million Bridge Loan, Kentucky Students Will Finally See Their Student Loans

Student Loan Girl — Fri, 05 Sep 2008 00:26:00 GMT

Students attending colleges and universities in Kentucky, many of whom have already begun their fall semester, will soon receive their federal student loans now that the state has finalized its $50 million bridge-loan deal with the state’s nonprofit student loan provider, according to an article in the News-Democrat Leader (“Public, Non-Profit Student Loan Provider to Get Proper Funding,” Sept. 2, 2008).

Under the deal, which was approved last Friday, the state will buy a $50 million bond from Kentucky’s federal student loan agency, the Kentucky Higher Education Student Loan Corp., also known as The Student Loan People.

Kentucky Gov. Steve Beshear proposed the bridge-loan deal in August after the state loan agency announced it had run out of money to issue new student loans. The $50 million loan will provide the student loan lender with the short-term bridge financing it needs to participate in a Department of Education program designed to help struggling lenders.

With the bridge financing in place, The Student Loan People will be able to finish disbursing the remaining $35 million in federal student loans it has originated.

So far, Kentucky is the only state in the nation to buy a private bond from a student loan provider under the Education Department’s loan purchase program, which allows lenders holding federal student loans that they have already originated and dispersed to borrow money from the Education Department. The Student Loan People can use these borrowed funds to begin repaying the $50 million bridge loan from the state.

Edward Cunningham, CEO of The Student Loan People, has assured borrowers that his agency will work closely with the schools it lends to in order to minimize further disruptions in the student loan disbursement process.

“The process should be transparent for most students, Cunningham said, “and we expect our student loan processes will be back to normal by September.”

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Kentucky Set to Buy $50 Million Bond So Students Can Get College Loans

Student Loan Girl — Mon, 18 Aug 2008 22:57:00 GMT

To ensure that Kentucky students get the money they need to pay for school, Kentucky Gov. Steve Beshear has authorized the state to buy a $50 million bond from the state’s student loan agency just before fall classes get underway, reports the Lexington Herald-Leader (“State Using $50 Million Bond to Solve Student Loan Crisis,” Aug. 16, 2008).

Affected by the ongoing credit crunch, the Kentucky Higher Education Student Loan Corp., also known as the Student Loan People, ran out of money last week, but with the “bridge loan,” will be able to begin issuing $35 million in loans to about 16,000 students by Thursday.

Although the recently passed Ensuring Continued Access to Student Loans Act (H.R. 5715) was designed to give the U.S. Department of Education the authority to buy student loans from cash-strapped lenders, the Education Department requires that lenders first obtain short-term “bridge” financing to initially fund new loans. After lenders secure the preliminary financing, the Education Department will buy these college loans, giving lenders the liquidity they need to continue making new loans.

Kentucky is thought to be the first state in the nation to purchase a private placement bond to meet the state’s student-loan needs. Massachusetts has unsuccessfully looked to its public pension funds for relief, while other states have simply shut down their student loan operations, according to an article in the Kentucky Post (“Gov. Orders State Purchase $50M Bond to Ensure Student Loans,” Aug. 15, 2008).

The Student Loan People’s bond sale must be approved by the State Property and Building Commission, an executive branch panel that meets today, and the General Assembly’s Capital Projects and Bond Committee, which will meet Tuesday.

If the bond sale is authorized, the nonprofit state loan agency will have a loan term of 445 days that would be payable on Nov. 15, 2009. The agency will be charged a variable interest rate, currently set at 3.32 percent, which means the agency would pay $1.9 million in interest to the state, on top of the $50 million principal.

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Number of Students Applying for Federal Financial Aid Goes Up Almost 20%

Student Loan Girl — Tue, 12 Aug 2008 23:21:00 GMT

While college enrollment is only expected to grow by 300,000 students this year, some 1.3 million additional college students have already applied for federal financial aid — an increase of 17 percent, according to an article in U.S. News World Report (“Financial Aid Applications Jump 17 Percent,” Aug. 11, 2008).

The U.S. Department of Education accepts the Free Application for Federal Student Aid (FAFSA) between January 1 and June 30 of every year. (Submitting the FAFSA is the only way undergraduates can apply for federal grants and student loans.) In the first six months of 2008, the Education Department received more than 9 million FAFSAs, up from 7.7 million in 2007.

Some financial aid experts are postulating that this increase is a sign that more students are unable to afford their school costs this year, as college tuition continues to rise, outpacing cost of living, and as high gas and food prices, along with the current credit crunch, leave families with tighter budgets and fewer financing options.

“What we are seeing is more people filling out requests for financial aid, and for those who do, more people are qualifying and the aggregate need is increasing,” says Richard Toomey, associate vice provost at Santa Clara University (“Student Aid Requests Soar as Economy Plummets,” San Francisco Chronicle, Aug. 11, 2008). “Students who haven’t needed assistance before are coming in. You had to expect that this was going to happen with all the news of companies laying off thousands of people.”

Donald Heller, director of the Center for the Study of Higher Education at Pennsylvania State University, has a different theory: He believes the surge in FAFSA submissions could simply mean that more eligible students are becoming aware of their federal financial aid options and are trying to take advantage of them.

Extensive press coverage of a potential student loan availability crisis and the news of elite institutions expanding their financial aid offerings to accommodate more low- and middle-income families may have helped encourage more students to apply this year, Heller says.

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Education Department at Fault for Low Participation in Grant Programs, Audit Shows

Student Loan Girl — Tue, 05 Aug 2008 00:58:00 GMT

In an audit of the Department of Education, the department’s own inspector general blames the lack of participation in the government’s Academic Competitiveness and National Smart Grant programs on his department’s failure to effectively promote the programs, according to an article in The Chronicle of Higher Education (“Education Dept. Blamed for Not Doing Enough to Promote Grants,” August 4, 2008).

Low-income students who completed their state’s rigorous coursework requirements in high school are eligible for Academic Competitive Grants, otherwise known as ACG, during their freshmen and sophomore years of college. Smart Grants are awarded to low-income college juniors and seniors who are taking classes toward the completion of specific majors, including math, engineering, or technology, and maintain a 3.0 GPA.

The audit, released Friday, suggests that the Education Department hasn’t done enough to “follow-up with nonparticipating schools to ensure those [schools] required to participate” in the two programs were doing so, the inspector general said.

Although Congress approved $790 million in grants for the two programs during the 2006–07 academic year and up to $4.5 billion through 2010, the Education Department only awarded $242 million in Academic Competitiveness Grants to 310,000 students, and only $206 million in Smart Grants to 64,000 students.

Secretary Spellings Justifies Programs’ Shortcomings

Last month, Education Secretary Margaret Spellings suggested that the low participation in the grant programs was due to the fact that not enough high schools were teaching courses that meet the academic standards of the program.

While Spellings lays the blame on high schools, the inspector general’s report showed that the department had a list of 640 nonparticipating colleges and universities that were potentially eligible for the ACG program.

More than half of the schools did not respond to the department when it attempted to contact them. In a random sample of 75, or 23 percent, of these 330 nonparticipating schools, however, the report found that more than 83 percent were considered eligible.

And among the 310 schools that did respond to the department’s outreach, administrators at 23 percent of these schools said they didn’t know their schools were eligible. The inspector general found that more than 73 percent of these school were, in fact, eligible for the programs.

To improve participation in the programs, the inspector general recommends that the Education Department do a better job of reaching out to colleges and universities with eligible students. The department should also consider fining schools or taking away their eligibility to participate in the federal Pell Grant program if they have qualified students enrolled but don’t participate in the ACG or the National SMART Grant programs.

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Back from Surgery, Kennedy Calls On Community Colleges to Switch to Direct Lending

Student Loan Girl — Tue, 17 Jun 2008 18:11:00 GMT

Sen. Edward Kennedy, D-Mass., sent a letter Monday to the American Association of Community Colleges, urging its members to enroll in the government’s Direct Loan Program in order to ensure community college students have access to student loans for the 2008–09 academic year.

Kennedy, the chairman of the Senate Committee on Health, Education, Labor, and Pensions who is recovering from surgery to remove part of a malignant brain tumor, encouraged AACC member colleges to sign up for the direct lending program, which allows students and parents to take out student loans directly from the U.S. Department of Education.

Almost 100 lenders in the rival Federal Family Education Loan Program, in which student loans are provided by private lenders, have reduced or stopped offering borrower incentives, or have dropped out of the FFEL program altogether.

Government subsidy cuts and the fallout from the subprime mortgage crisis have hurt lenders and have prompted some to announce they will no longer offer student loans to certain community colleges and other two-year institutions whose borrowers tend to carry smaller, less-profitable loans.

"Since lenders continue to say they may have to limit new loans to certain colleges, it’s possible that the neediest students, particularly those at community colleges, will need an alternative to the bank-based FFEL program," Kennedy wrote.

David Baime, vice president of government affairs for the AACC, countered that the problem is not that student loans are inaccessible, but that community college students tend to borrow more money than they can afford to repay ("Kennedy Urges Community Colleges to Enroll in Direct-Loan Program," June 17, 2008).

That’s why the association is pushing a measure through Congress, Baime says, that would give colleges the authority to reduce maximum college loan amounts that students could borrow under the federal student loan programs.

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