Student Loan Blog : Stafford Loans

Nonprofit Lenders Hurt by Legislation Intended to Help Them

Student Loan Girl — Sat, 02 Aug 2008 01:53:00 GMT

Legislation that went into effect in October with the College Cost Reduction and Access Act cut federal subsidies to for-profit student loan lenders partly in an attempt to give nonprofit lenders a more competitive edge in the student loan market.

But as lenders continue to scale back or suspend their student loan programs amid a troubled economy and now-unprofitable federal education loans, newer legislation designed to help struggling lenders — nonprofit student loan providers in particular — may be doing more harm than good, writes Paul Basken in The Chronicle of Higher Education (“Federal Rescue Plan May Have Overlooked Nonprofit Lenders,” Aug. 1, 2008).

Government Positioned to Provide Lenders With Funds … But Only If Funds Are Already There

When it became clear that skittish investors, burned by the collapse of subprime credit markets, would no longer buy lender’s student loan portfolios in the secondary market, the government responded by passing the Ensuring Continued Access to Student Loans Act in May, allowing the Department of Education to purchase federal student loans from lenders or to use a lender’s student loan portfolio as collateral for a low-interest line of credit. Both provisions were intended to provide lenders with the needed capital to make new loans, which investors were no longer providing.

The continuing credit crunch, however, has hit nonprofit lenders so hard that they lack the liquidity to even begin issuing new student loans; without new loans, these lenders have nothing to sell or offer as collateral to the Education Department.

Peter Warren, executive vice president of the Education Finance Council, an association of nonprofit lenders, suggests that the recent legislation, by leaving nonprofit lenders still unable to bankroll federal student loans, has not done its job of shoring up the student loan market.

“You need to have access to funds in order to play in this game,” Warren says. “It’s essentially a Catch-22.”

Lower Interest Rates Cripple Lenders

Nonprofit lenders’ inability to secure capital has been even further aggravated by the recent drop in interest rates brought about by the subprime mortgage crisis, which has left student-loan lenders with a “negative subsidy” rate.

As Basken explains, lenders are now actually in the position of having to pay interest to the government on each unsubsidized student loan they issue, since the fixed 6.8-percent interest rate on these student loans is higher than current market rates. Meanwhile, lenders may not be receiving any corresponding principal or interest income from student loan borrowers, who aren’t required to make payments on these federal student loans while they’re in school at least half time.

These lenders, says Shelly Repp, general counsel for the National Council of Higher Education Loan Programs, simply “don’t have enough working capital to carry all the expenditures they’re expected to make.”

In response to the ongoing liquidity issues facing nonprofit lenders, lawmakers are pushing the federal government to come up with new solutions quickly, calling for a hearing next month to consider new options for student loan providers and asking President Bush to offer additional help to nonprofit lenders.

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Low-Income Students May Get Free Tuition at Houston Community College

Student Loan Girl — Mon, 14 Jul 2008 22:07:00 GMT

Students who are eligible for a new scholarship program at Houston Community College could have up to two years of their college education paid for.

To qualify for the scholarship program, students must be eligible to receive a Pell Grant, a form of federal financial aid that is offered to some of the nation’s most financially-needy students.

HCC’s scholarship fund, known as Opportunity 14, is designed to help low-income students who qualify for some financial aid, but who do not receive enough to completely cover the total cost of their education, according to an article in the Houston Chronicle (“HCC Program Makes College Free,” July 13, 2008).

Opportunity 14, which is sponsored by the Houston Community College Foundation, will pay for eligible students’ college expenses that are not covered by federal aid, like grants and subsidized Stafford student loans, and state grants.

Students could receive up to $6,000 over a period of two years with a maximum of $1,500 during fall and spring semesters and $1,000 for summer semesters. In most cases, the college says, the combination of financial aid and Opportunity 14 scholarship funds will cover all costs of students’ tuition, fees, and textbooks.

As many as 1,500 students may be eligible for the program this year.

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NextStudent Unveils Website with New Look, Improved Features

Student Loan Girl — Sat, 07 Jun 2008 01:37:00 GMT

NextStudent has a sleek new website with upgraded features designed to offer you the most comprehensive and easy-to-use financial aid resource on the Web.

We’ve simplified our online application to make applying for student loans even easier, whether you’re a parent, undergraduate, or graduate.

Learn more about private student loans, Stafford loans, PLUS loans, Grad PLUS loans, and student loan consolidation.
Find free money for college with our award-winning NextStudent Scholarship Search Engine, which lists more than 5.9 million scholarships worth over $16 billion.
Sign up for our monthly NextPath newsletter for tips on everything from snagging a summer job to how to survive the economy with 10 easy ways to save money right now. Grads, get the scoop on the top 10 cities for jobs or how you can travel the world rent-free.
Check our education news bulletins to keep up to date on what’s happening in the world of financial aid, student loans, and higher education — all the changes and developments that affect you and how you’ll be able to pay for school.

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Banks Become More Selective, Leaving Some Colleges Without Student Loans

Student Loan Girl — Tue, 03 Jun 2008 00:49:00 GMT

Students at community colleges, for-profit universities, and other less competitive institutions may have trouble finding a lender willing to offer them federal student loans as some of the nation’s biggest banks pare down the list of schools they serve, according to an article that appeared today in The New York Times (“Student Loans Start to Bypass 2-Year Colleges,” June 2, 2008).

Citibank, JPMorgan Chase, PNC, and SunTrust are no longer offering student loans to certain colleges — schools that the banks have determined tend toward higher default rates, fewer borrowers, and small loan amounts that make business less profitable.

More than 6.2 million — over 40 percent — of the nation’s undergraduates attend community colleges. These students, according to the College Board, borrow an average of $3,200 a year.

In late May, Citibank, one of the nation’s largest providers of student loans, announced its student lending division, the Student Loan Corporation, would temporarily suspend lending to schools whose borrowers tend to have college loans with “lower balances and shorter periods over which we earn interest.” Citibank also announced it would cease lending to schools it anticipated to have minimal loan volume.

“The logic is so flawed, that for us to have volume with them in the future, we have to have had volume with them in the past,” said Korey Compaan, financial aid director at William Jessup University in Rocklin, Calif. To deny federal student loans to students based simply on the college they attend, he said, is “totally and completely unethical.”

Sallie Mae and Nelnet have recently reaffirmed their commitment to offering federal college loans regardless of the institution a student attends. And Wells Fargo has contacted financial aid administrators at schools dropped by Citibank to express a willingness to lend to their students.

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Private Student Loans: Who Gets Them and Why?

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

When the federal funds run dry and you still need more money to cover the costs of college, what do you do? Well, many students turn to private loans in order to foot the ever-increasing collegiate tuition bill. Private student loans can cover everything from tuition to books and new computers, and the borrowing limits are quite a bit more generous than Stafford loans, subsidized or unsubsidized. But, what does this new trend mean? It means there is a gap in federal aid out there, that the student loan industry is changing and someone needs to figure out why.

According to a Dec. 15, 2006 article titled “IHEP Issues Study on Private Loans” that appeared in the National Council of Higher Education Loan Programs Inc.’s Daily Briefing, the Institute for Higher Education Policy (IHEP) issued a report Dec. 15, 2006 that “provides information on use of private loans, factors contributing to their use and how the use of private loans may change the student loan landscape.” The report, titled “The Future of Private Loans: Who is Borrowing and Why?” can be found online at http://www.ihep.org/Pubs/PDF/FutureofPrivateLoans.pdf.

The briefing went on to explain that the “Findings from the report largely draw on previously issued information on federal student aid, as well as financial aid data collected by the Department of Education and interviews from industry experts.” In the report private loans are defined as “those funded by commercial financial institutions, offered outside of the federal loan programs, and not guaranteed against default by the federal government.”

Rising College Costs and Low Federal Borrowing Limits

It’s just plain true that college costs are on the rise. Some experts blame inflation, others blame the rising salaries of university presidents, and one paper that prides itself on “All the News that’s Fit to Print,” even ran an article in which a university claimed that its enrollment increased as its tuition increased. The Daily Briefing reported, “According to the report, rising college costs and student loan interest rates coupled with stagnant federal borrowing limits are helping to bolster the popularity of private loans.”

Let’s talk about those borrowing limits for a second. Did you realize that Stafford loans all have fairly low borrowing limits for dependents: freshman year, $2,625; sophomore year, $3,500; and junior and senior year, $5,500. So, if you only can borrow up to $2,625 in Stafford loans for your freshman year, but you are going to a school that costs $25,000, you will need to look into a PLUS Loan – Parent Loans for Undergraduate Students or, you guessed it, a private loan.

The Daily Briefing article said that the report breaks down the facts accordingly: “Concerning private loan borrowers, 83 percent are undergraduate students, 9 percent are professional students and seven percent are graduate students. While undergraduate students comprise the largest sect of private loan borrowers, professional and graduate students actually take out larger loans ($11,000, $8,000 respectively vs. $6,000). Of note, the report found that private loan borrowers also take advantage of available federal loans, as ninety percent of professional and three-quarters of graduate private loan borrowers receive a Stafford loan (with the vast majority borrowing at the maximum). The report also recognizes that some borrowers do not borrow the maximum Stafford or receive a Stafford loan at all and cites the following factors: initially low-interest rates on private loans, inability to qualify for federal loans, perceptions about the ease of obtaining private loans, or lack of awareness about federal loan options and benefits.”

Learn More about Private Loans

The report concludes, according to the Daily Briefing article, with the statement that “the need for targeted consumer education on the pros and cons of private loan borrowing is critical.” If you need to look into private loans to help cover the costs of your education, NextStudent offers aggressive incentives including no payments until after graduation, no application fees or deadlines and annual borrowing limits up to the full cost of expenses (less financial aid received) or $40,000 (whichever is lesser).

The student loan advisors at NextStudent are helpful and knowledgeable about student loans. They are a trusted source in getting you the appropriate information about your student loan consolidation, student loan options and helping students get the college financing they need. Go to www.nextstudent.com for more information.

Be sure to tune in next Thursday for my next blog on student loan advice.

Student Loan Girl

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