Student Loan Blog : FFELP lenders

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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Federal Student Loan Lenders Fight for Survival

Student Loan Girl — Mon, 30 Mar 2009 23:52:00 GMT

In what is being viewed as a direct hit to private third-party lenders in the Federal Family Education Loan Program who are fighting to keep the program alive, the U.S. Department of Education’s preliminary data paints the FFEL program as a costly and ineffective system with a 7.3-percent student loan default rate, two whole points higher than the default rate for the Direct Loan Program (“Private Lenders Brace for Fight Over Student-Loan Role,” The Wall Street Journal, March 27, 2009).

Since its launch in the 1960s, FFELP has been the primary source of federal student loans. This year the FFEL program has already lent more than $56 billion in student loans, while the Direct Loan Program has lent just $20 billion. But President Obama has proposed axing the FFEL program, which costs the federal government billions of dollars in subsidies each year, in favor of the government’s Direct Loan Program, through which families borrow directly from the government.

FFELP lenders have said that the Education Department’s untimely release of the student loan default rate data — taken from fiscal year 2007 — was purely political since the government has never released preliminary default rate data and has never broken down the data by the two programs. Industry analysts say the data reflects the differences in the two programs: FFELP lenders typically cater to more students from for-profit schools who tend to default at a higher rate than students in the Direct Loan Program.

Department of Education officials have said they released the data in response to a U.S. Freedom of Information Act request from The Wall Street Journal and inquiries from Congressional leaders.

“It’s unfortunate the rates are being released before there is an analysis of them,” said Brett Lief, president of the National Council of Higher Education Loan Programs, a trade group that represents FFELP lenders and federal loan guarantee agencies. “This is very serious stuff and I’m saddened that it has come out like this.”

No Cut-and-Dry Solution to the FFELP Dilemma

While the Consumer Bankers Association, which represents certain FFELP lenders, has sent Congress a 2,500-signature petition asking legislators to reject the president’s proposal to eliminate the FFEL program, industry observers don’t see the battle over FFELP ending quickly or simply.

The Congressional Budget Office has said eliminating the program would save the government nearly $100 billion over the next 10 years, which President Obama plans to redirect to the Federal Pell Grant program. This potential funding boost for Pell Grants, which are awarded to the nation’s neediest students, could make it harder for legislators who support FFELP to successfully argue to keep the program alive.

However, some legislators who oppose the FFEL program face strong opposition from their home-state guarantee agencies that work with FFELP lenders to service college loans for students in their state. Legislators may also have to battle student loan giant Sallie Mae, which has said that keeping certain elements of FFELP might actually make it possible for the government to draw additional Pell Grant funding from FFELP itself. Sallie Mae has also pointed out that its borrowers, who partake in default prevention programs through state loan-guarantee agencies, are 30 percent less likely to default than direct loan borrowers.

“It’s certainly possible Congress would eliminate the program,” said Terry Hartle, a senior vice president of the American Council of Education, a trade group representing colleges and universities. “But it’s equally possible — and perhaps more so — to wring more savings out of the [FFEL] program and put the savings into Pell.”

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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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Survey Shows New England Families Can Still Access Federal Student Loans, Despite Loss of Lenders

Student Loan Girl — Thu, 11 Sep 2008 22:29:00 GMT

According to a regional survey of financial aid officers from 214 New England colleges and universities, students and parents have had few problems accessing federal student loans this year, but financial aid administrators have lingering doubts about how easily students will be able to secure college loans next year (“Student Loan Availability Survey of New England Colleges & Universities,” The New England Council, September 2008).

The survey, conducted by the New England Board of Higher Education and The New England Council, asked financial aid officers to describe how New England families fared following federal legislation that Congress passed in May to help families pay for college.

The legislation was designed to ensure that families still have access to federal student loans as private, third-party lenders — crippled by fallout from the subprime mortgage crisis that dried up traditional sources of funding and hurt by legislation that cut $21 billion in their federal subsidies — continue to drop their federal student loan programs.

To date, 104 of these lenders have stopped participating in the Federal Family Education Loan Program, through which borrowers take out their federal student and parent loans from third-party lenders rather than through the federal government.

Although some families were forced to find a new student loan provider after their former lender suspended its federal student loan programs, New England financial aid officers indicated that borrowers have not been deterred from seeking FFELP loans.

In fact, the survey revealed, more parent borrowers are seeking federal PLUS loans through FFELP lenders this fall and more students are taking out unsubsidized federal Stafford student loans.

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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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Concerns About Access to Student Loans Persist, Study Finds

Student Loan Girl — Thu, 24 Jul 2008 18:42:00 GMT

Some financial aid administrators have lingering concerns that students may not be able to get the student loans they need to pay for college this year despite recently passed federal legislation designed to improve students’ access to those loans, according to a recent survey.

The survey, released this week by the National Association of Student Financial Aid Administrators, showed that NASFAA members who participated in the survey felt that the Ensuring Continued Access to Student Loans Act, HR 5715, may help to alleviate a student loan shortage in the short-term but that a long-term solution is still needed.

More than half of the financial aid administrators who responded to the survey said they had been dropped by at least one lender in the Federal Family Education Loan Program, even though that same lender is still offering student loans to other institutions. Several lenders in the FFEL program announced last spring that they would stop offering student loans to colleges with high default rates, low loan volumes, or both — a practice that 60 percent of the NASFAA members who responded to the survey say is discriminatory and should be prohibited by Congress.

Survey participants were split over the issue of private student loans, which are not backed by the federal government. About half said they thought students would have a more difficult time obtaining private student loans this year but most agreed that the private student loan market has stabilized.

The survey, however, revealed that only a quarter of financial aid administrators have a backup plan in place to handle any problems should the federal and private student loan markets face further disruptions.

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Penn State’s Switch to Direct Loan Program Underway, So Far So Good

Student Loan Girl — Fri, 11 Jul 2008 23:43:00 GMT

Pennsylvania State University said its transition over to the federal Direct Loan Program is going “smoothly.” Already about 3,000 borrowers have taken out $5 million in student loans under the new program this summer, according to an article in The Daily Collegian (“PSU Direct Loan Program Successful,” July 11, 2008).

The university made the switch to the federal Direct Loan Program — in which students and parents borrow federal Stafford, graduate PLUS, or parent PLUS loans directly from the federal government — in March after the state’s student loan agency announced it would no longer be able to issue federal student loans.

More than 90 percent of Penn State’s borrowers were dropped by their federal student loan lenders after these private lenders, who were affected by the volatility of the nation’s credit markets, left the Federal Family Education Loan Program.

Wishing to offer students a more stable and predictable system of lending, Penn State decided to join the Direct Loan Program and move away from the FFEL program under which students could take out student loans through banks and private lenders.

“Our concern was that students might pick a [FFELP] lender, and that lender might subsequently quit making loans,” said Anna Griswold, Pennsylvania State’s executive director of student aid.

In the fall, Griswold estimates that about 40,000 Penn State students will borrow $400 million in student loans through the Direct Loan Program.

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Proposed Legislation Would Prevent Student Loan Lenders from ‘Cherry-Picking’ Schools They Lend To

Student Loan Girl — Fri, 20 Jun 2008 01:14:00 GMT

To ensure all students have access to student loans regardless of what type of school they attend, two Democratic senators introduced legislation Tuesday that would prohibit banks and other lenders from “picking and choosing” which institutions of higher education they do business with, according to a New York Times article (“Bill Promotes Universal College Loans,” June 18, 2008).

Under the proposal, lenders that participate in the Federal Family Education Loan Program would have to extend credit to any eligible student, regardless of a student’s income or the type of institution they attend, as long as the student’s college is a member of the FFEL program, writes Times reporter Jonathan Glater.

Senators Patty Murray, D-Wash., and Christopher Dodd, D-Conn., introduced the legislation in response to the decision of Citibank, JPMorgan Chase, PNC, and SunTrust to stop offering student loans to community colleges and other two-year institutions.

“Lenders offering loans backed by taxpayer dollars shouldn’t be able to discriminate against certain schools or students,” Murray said in a statement. “Denying loans based on school, program length, or income level locks the door for far too many.”

Bill Faces an Uncertain Future

Banks who have ceased lending to certain two-year institutions contend that they lose money on the loans. Schools that have been cut off by the banks tend to have higher default rates and fewer borrowers with small loan amounts — financial factors that, lenders say, make business at these schools less profitable.

But financial aid administrators counter that lenders should not be allowed to “cherry-pick,” because selective lending could make it harder for low-income students to pay for college.

The proposal, which is under review by the U.S. Department of Education, has already been met with controversy. Some financial aid officials support the measure as way of ensuring access to student loans, while others believe it might have the unintended consequence of pushing lenders out of the federal student-loan business altogether at time when over 100 lenders have already left the FFEL program.

While the bill’s prospects are unclear, Sen. Edward Kennedy, D-Mass., chairman of the Senate Committee on Health, Education, Labor, and Pensions, is expected to co-sponsor the bill.

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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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