Student Loan Blog : Federal Student Loan Program

Overhaul of Student Loan System in the Works

Student Loan Girl — Mon, 22 Jun 2009 15:30:00 GMT

A bill to overhaul the student loan industry may reach Congress as early as next week; education-committee chairs are working behind the scenes on a piece of legislation that would eliminate the third-party student loan system called the Federal Family Education Loan Program, The Chronicle of Higher Education reports (“Behind the Scenes, a Student-Loan Overhaul Takes Shape,” June 16, 2009).

Although few details have been released about the proposed legislation, lenders and a large number of Congressmen are hoping the FFEL program won’t end up on the chopping block like President Obama has proposed. Already as many as 13 counterproposals to the elimination of FFELP have begun circulating Congress, including a detailed plan from lending giant Sallie Mae.

It’s not likely, however, that the FFEL program will survive this legislative session, some Congressmen say, considering taxpayers could see as much as $94 billion in savings over the next 10 years if FFELP were eliminated, according to estimates from the Congressional Budget Office.

Obama had originally suggested that these savings, which have been readjusted down to $87 billion, could be used to increase Pell Grants award amounts each year at a rate equal to the Consumer Price Index. It now looks like Congress will, instead, propose that the money be infused into the Pell Grant program to allow appropriators to “continue to set the maximum [Pell Grant] award” so as not to end up capping the maximum award amount.

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Private Student Loans: Proceed With Caution

Student Loan Girl — Mon, 04 May 2009 21:07:00 GMT

Although the government has taken steps to bolster the federal student loan program by expanding Pell Grant awards and raising the maximum award amount of federal Stafford student loans, federal financial aid will still not be enough for many families to pay for college this year.

Grappling with stock market losses that have negatively affected 529 college savings plans and with declining home values that have essentially made home equity loans nonexistent, families of college students will likely have to rely more on private student loans, in addition to federal aid, this year to help pay for their education expenses, reports The New York Times (“Students’ First Lesson: Beware Loans’ Fine Print", May 2, 2009).

But the Times warns that private student loan borrowers need to be particularly cautious when applying for loans.

Private student loan lenders can set their own loan terms and aren’t required to inform their borrowers of the loans rates, fees, and terms. Citing data compiled by Student Lending Analytics, a company that helps schools analyze lending programs, the Times advises families applying for private student loans to weigh their options carefully and to take a close look at the fine print.

Interest Rates Vary From Lender to Lender

Unlike federal student loans, which have fixed interest rates, private student loans carry an average interest rate of 11 percent, according to Student Lending Analytics. However, lenders charge interest rates higher than 11 percent and, in some cases, won’t disclose the interest rate a borrower will be charged until after a borrower signs a promissory note.

Banks offer fixed-rate loans ranging from 7 percent to 12 percent, with big banks charging the highest rates. But at times, banks — particularly JPMorgan Chase, PNC Financial, and SunTrust Bank — hike up the rates on these loans by two to three percentage points if a borrower misses just one loan payment.

The variable-rate loans that private lenders offer can be tied to a specified interest rate index, like the prime rate, and their rates can vary depending on the changes to rate index. Chase, for example, charges interest as high as 13.5 percent on these loans.

Lenders Should Disclose All Fees

Tim Ranzetta, the founder of Student Lending Analytics, says lenders should be required to disclose any adjustments they make to an interest rate when a borrower misses a payment or when any other negative activity takes place on a borrower’s account.

Currently, lenders don’t disclose all the possible fees borrowers may be charged in the servicing and collection of their student loans, and lenders’ loan contracts don’t always inform borrowers of the borrower benefits promised in the lender advertisements, including the possibility of a borrower being charged a lower interest rate after graduation.

Ranzetta says, in addition to demanding that lenders fully disclose their loan terms, lenders should also be required to list their advertised benefits in the promissory note in order to contractually obligate lenders to offer their benefits.

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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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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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Paying for College Gets More Challenging For Families

Student Loan Girl — Thu, 23 Oct 2008 00:42:00 GMT

Paying for college definitely isn’t getting any easier.

“It just seems like it’s really hard, because it is,” says Diana Jacobs, a mother of twin, college seniors, whose husband recently lost his job, forcing the family to go from borrowing modestly to maxing out their student loan amounts (“In Downturn Families Strain to Pay Tuition,” The New York Times, Oct. 16, 2008).

To meet her sons’ college expenses this year, Jacobs pressured the twins’ schools to increase their financial aid offers — each school offered $3,000 more in aid. And for the first time, Jacobs told her sons that she wouldn’t be able to assume their student loan debt, leaving the twins to take out their college loans in their own names.

“We all came to that consensus, but I hate it,” Jacobs said. “I hate for them to come out of school with $20,000 in student loans.”

The Jacobs family is not alone. The current economic conditions have made it even more difficult for families to afford the continually rising cost of college: unemployment is rampant, the cost of living is increasing, and home values are declining, making it more difficult for families to get home equity loans to help fund college expenses.

Slow Economy Causing Widespread Financial Challenges

Economic times have become so challenging that a recent survey of nearly 3,000 parents found that 62 percent of families plan to use student loans to help pay for college expenses this year, up from 53 percent just a year ago, according to Fidelity Investments’ College Savings Indicator.

The survey also revealed that parents may meet only 21 percent of the total cost of their children’s college education this year, down from 24 percent last year.

Families’ financial challenges have led to a 10-percent increase in financial aid applications this year. Aid administrators are concerned that this increased demand for federal financial aid — from 12.3 million applications last year to 13.5 million this year — may be too much for the government and schools to handle, now that more than 100 private, third-party lenders, citing reduced profit margins and increased difficulty finding investors, have left the federal student loan program.

Making the federal financial aid problem worse, states are facing widespread budget shortages and cutting back on the financial aid funding they give to colleges and universities, and schools’ own financial aid funds are dwindling due to disappointing returns on their endowments.

The economic downturn has also forced private student loan lenders who offer credit-based private student loans, which help families fill the gap between federal financial aid and the total cost of attendance, to rapidly adapt to changes in the credit markets. In recent months, these lenders, to avoid having borrowers default on their loans, have tightened their credit criteria, causing students who had previously borrowed on their own to need cosigners this year.

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Government’s Direct Lending Program Sees 43-Percent Increase in Volume

Student Loan Girl — Wed, 03 Sep 2008 00:36:00 GMT

As cash-strapped lenders continue to drop out of the Federal Family Education Loan Program, the number of student loans originated for the 2008–09 school year through the government’s Direct Loan Program has increased by 43 percent, reports The Chronicle of Higher Education (“As ‘Crisis’ Deters Loan Companies, Direct Lending Sees 43-Percent Jump,” Sept. 2, 2008).

Lenders in the FFEL Program — through which borrowers take out federal student loans through private, third-party lenders including banks, state agencies, and nonprofit lenders — have generally accounted for 80 percent of all federal student loan volume, according to the House Committee on Education and Labor (“The College Loan Landscape,” March 2008).

But the Direct Loan Program, which provides loans to students and parents directly from the Department of Education, is gaining ground. As of August 8, the Direct Loan Program had already originated more than $10.84 billion in federal student loans at 1,156 colleges and universities. At this time last year, the direct-lending program, had originated just $7.55 billion in loans at 851 institutions.

And although the exact figures have yet to be released, the Education Department estimates that the Direct Loan Program, which has generally made up 20 percent of all federal college loan volume, will soon be comparable in size to the FFEL program. FFELP lenders have only issued $13 billion in federal student loans at 3,230 colleges and universities this academic year, compared to the $55.8 billion in student loans they originated at 4,612 schools last year.

So Far, A Smooth Transition to Direct Lending

Government subsidy cuts to FFELP lenders enacted by the College Cost Reduction and Access Act last September, as well as continued fallout from the subprime mortgage crisis, have led more than 100 lenders to suspend their participation in the FFEL program.

By April of this year, some 5.8 percent of lenders remaining in the FFEL program had switched over to the direct-lending program and another 19.3 percent said they were considering the switch, according to Student Lending Analytics, a company that provides financial aid administrators with data about lenders (“Drift Toward Direct Lending (Update),” Inside Higher Ed, April 30, 2008).

Although some lenders questioned the Education Department’s ability to handle an increase in loan volume through its Direct Loan Program, some financial aid administrators say the Department of Education has done well in handling the influx of business.

Anna Griswold, executive director of student aid and assistant vice president for undergraduate education at Penn State, says she has been “pretty pleased” with the Direct Loan Program and has not experienced any glitches. Penn State, the 10th-largest FFELP lender last year, became a direct-lending school this year after its FFELP lender, the Pennsylvania Higher Education Assistance Agency, stopped offering federal student loans in February.

Penn State borrowers have already taken out $100 million in student loans this year through the direct-lending program.

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Nursing, Teaching, Law Enforcement, Professions Losing Student Loan Incentives

Student Loan Girl — Fri, 13 Jun 2008 17:30:00 GMT

College graduates preparing to enter critical fields like nursing and teaching may no longer be able to take advantage of programs that previously offered them a break on their student loans.

In at least six states this year, state-affiliated lenders have dropped or scaled back programs that repay or forgive a portion of a borrower’s federal student loans when that student-borrower works in a critical-needs field, according to an article in USA Today (“Credit Crisis Weakens Relief for States’ Student-Loan Programs,” June 11, 2008).

Lenders are also eliminating loan programs that reduce student-loan interest rates for students who major in specific subjects.

These state loan agencies blame a $21-billion cut in government subsidies to lenders who participate in the federal student loan program and the ensuing fallout from the subprime mortgage crisis for making cuts to these incentive programs necessary.

More programs “are certainly at risk should the credit crisis continue,” says Krista Cole of the Education Finance Council, which represents student loan providers in 31 states.

Next month, Mike Reiber of the Pennsylvania Higher Education Assistance Agency, says the agency will stop funding programs for nurses, teachers, child care workers, and members of the military because the “money has literally dried up.”

Student Loan Benefits Being Reduced, Eliminated Nationwide

Other state student loan providers are already reducing or are trimming their borrower benefits for students in critical-needs fields:

The Missouri Higher Education Loan Authority will stop offering reduced student-loan interest rates for teachers, social workers, nurses, law enforcement personnel, firefighters, and National Guard members, beginning July 1.

The Iowa Student Loan Liquidity Corp. plans to cut student loan benefits for new teacher applicants this year.

The Michigan Higher Education Student Loan Authority eliminated a no-interest student loan plan in May for undergraduates majoring in engineering.

The New Hampshire Higher Education Loan Corp. suspended a benefit program in February that forgives some student loans for teachers.

The Kentucky Higher Education Assistance Authority suspended loan forgiveness programs for teachers, nurses, and lawyers in January and plans to reduce loan benefits for current borrowers.

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Sen. Hillary Clinton Unveils Plan to Tackle the Student Loan Crisis

Student Loan Girl — Tue, 29 Apr 2008 17:56:00 GMT

Sen. Hillary Rodham Clinton recently announced the details of a sweeping plan to help ensure students have continued access to federal student loans amid a flurry of private lenders leaving the federal student loan program.

“Hundreds of thousands of students who are actively considering how to finance their education could be left in the lurch, without the ability to pay for college,” Clinton wrote in a press release on April 25.

Clinton urged the Bush administration to act quickly to support her plan, which includes:

Creating a way for colleges to quickly make a switch from the Federal Family Education Loan Program to the Department of Education’s Direct Loan Program — a move that currently takes colleges about six weeks.

Allowing parents’ applications for credit-based federal PLUS loans to be reviewed on a case-by-case basis. Currently, parents will be denied outright for the low-cost federal loans if they have defaulted on a mortgage, or if they are 90 days late on a loan payment.

Authorizing the Education Department to advance money to state or private entities that issue student loans and to purchase federally guaranteed loans from private lenders that are no longer able to service the loans.

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Changes to Federal Loan Programs Reviewed

Student Loan Girl — Mon, 18 Dec 2006 21:22:00 GMT

At a meeting Dec. 12, 2006 assembled by the Department of Education, a committee discussed potential changes to regulations in federal student loan programs, according to a Dec. 13, 2006 article by Kelly Field titled “Rulemaking Panel Begins Debate on How to Change Federal Student-Loan Programs” that appeared in The Chronicle of Higher Education.

The committee, made up of individuals such as students and representatives of higher education institutions, guarantee agencies and lenders, will report to Secretary of Education Margaret Spellings in the spring with “a package of proposed rules,” the article stated.

Priority Items on Initial Agenda

As reported in Field’s article, there are several key elements that will be included in the recommended rules to Spellings. These include:

· Repayment Program Based On Income. In response to student groups and the Project on Student Debt that have asked the Department of Education to relieve the burdens of loan-repayment for those with low incomes, the panel is considering a “plan to create a new ‘partial economic-hardship deferment.’ ” Borrowers’ payments would be limited to a maximum of 15 percent of their discretionary income, calculated at 150 percent of the poverty level. The figure also would take family size into consideration.

· Identity Theft Victim Loan Discharge. Current law stipulates that fraudulent funds illegally borrowed in the victim’s name only can be discharged in court and only when the court has reached a decision that a crime has been committed. The proposal entails adopting the identity theft definition as outlined by the Federal Trade Commission and the Fair Credit Reporting Act in order to avoid the long wait required for the court rendering.

· “Preferred Lender” Lists Used by Colleges. The Department of Education, concerned that some institutions are being influenced by benefits provided by lenders to colleges, will review colleges’ use of preferred lender lists. Colleges maintain that the lenders they suggest simply represent companies with the most benefits and best rates offered to students.

· Unlawful Incentives for Guaranteed-Loan Programs. The article said that the panel will scrutinize whether lenders offer illegal “inducements to secure loan applications” from borrowers or if lenders generate advertising that misleads the consumer.

Other Proposed Additions Discussed

According to Field’s article, a much-needed suggestion that would greatly benefit institutions of higher education across the country was posited by Alisa M. Abadinsky, a University of Illinois at Chicago student-aid official. She recommended that the money collected on defaulted Perkins loans be returned to the schools that awarded the loans instead of going to the U.S. Treasury, as currently is the case, the article said.

Eileen K. O’Leary, chairwoman at the National Direct Student Loan Coalition, also proposed that loan servicing companies “be required to provide borrowers with periodic reminders of their repayment options,” the article said.

It is important to keep up to date on all the news regarding student loans and education.

Talk to the education financial advisors at NextStudent. They have all the information and advice you need on student loans. Check out www.nextstudent.com.

Be sure to tune in next Monday for my next blog on student loan issues in the news.

Student Loan Girl

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