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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Shares of Corinthian Colleges Stock Take Nosedive Over Student Loan Defaults

Student Loan Girl — Fri, 29 Aug 2008 01:56:00 GMT

Despite an 11.5-percent boost in student enrollment and an 18.3-percent growth in revenue over the last quarter, Corinthian Colleges saw its shares tumble in afternoon NASDAQ trading on Tuesday, as investor fears persist of rising defaults on the school network’s student loans (“Defaults Drown Corinthian,” Forbes, Aug. 26, 2008).

Corinthian’s stock value plummeted 19.3 percent, with investors selling off shares even as the company posted a smaller-than-expected fourth-quarter loss, thanks to higher revenues spurred by the increase in enrollment.

Second-Worst Stock Downslide Since Being Dropped by Main Student Loan Provider

Corinthian, a for-profit operator of more than 100 colleges and trade schools in the United States and Canada, has been struggling to maintain a source of financing for its 72,000 students ever since three of its largest student loan providers — Sallie Mae, College Loan Corp., and Student Loan Express — informed the company that, effective March 1, they would no longer be able to offer “serial” private student loans to the schools’ subprime borrowers. These serial transactions provided current subprime student borrowers — those who have weaker or limited credit histories — with subsequent student loans for ongoing studies.

In 2007, over 75 percent of Corinthian’s private student loan portfolio consisted of subprime student loans, and 90 percent of Corinthian’s private student loans in the United States were provided by Sallie Mae.

In fact, the 19-percent drop in Corinthian shares on Tuesday was the biggest percentage decline only since Sallie Mae made its announcement, on January 22, that it would stop issuing subprime private loans to Corinthian’s students. In the last 12 months, up until Tuesday, reports Bloomberg, Corinthian shares had risen 20 percent (“Corinthian Falls After Increases in Student Lending,” Aug. 26, 2008).

Taking Student Loans Into Its Own Hands: Inviting Risk With Revenue

To offset its loss of student loan lenders, Corinthian established a new company-sponsored student loan program in the fourth quarter called ACCESS and, according to Chief Executive Officer Jack Massimino, was able to provide funding for “the vast majority of students.”

But with a greater volume of student loans comes increased exposure to potential student loan defaults, and Corinthian’s defaults in the fourth quarter rose to 9.1 percent of its revenue, compared to 6.2 percent a year ago.

Corinthian’s chief financial officer, Kenneth Ord, said that for the 2009 fiscal year, Corinthian will spend all available cash on student loans that isn’t already earmarked for capital expenditures; however, investors are still uneasy, worried that Corinthian will fall short of its projected earnings for 2009 and may need to write off some of its student loans to stay afloat.

The company’s student loan program — and the higher rate of borrower defaults that investors fear is coming with it — “adds risk to the forecast,” said Jeffrey Silber, an analyst with BMO Capital Markets. “People were expecting sizable margin expansion, and this is going to put a damper on that. People are not giving [Corinthian] the benefit of the doubt.”

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Student Loan Blog : Forbes

FAFSA Discourages Students From Applying for Federal Loans

Shares of Corinthian Colleges Stock Take Nosedive Over Student Loan Defaults