Student Loan Blog : credit crunch

College Steps in After Edamerica Falls Behind in Dispersing Student Loans

Student Loan Girl — Tue, 30 Sep 2008 16:03:00 GMT

A Milwaukee technical college is providing emergency student loans to some of its students after one of the college’s student loan providers announced it would not immediately have funds to issue the loans, reports the Milwaukee Journal Sentinel (“MATC Offers Emergency Loans After Edamerica Delays Payments,” Sept. 23, 2008).

To assist students, Milwaukee Area Technical College decided last week that it would tap into its general fund to provide more than $250,000 in emergency student loans to 108 of its students who had taken out their college loans with Edamerica, the eighth-largest student loan provider in the country.

Edamerica was on the suggested lender list at both MATC and the University of Wisconsin-Milwaukee but was removed from the lists when the schools learned Edamerica had also fallen behind in dispersing loans to students at other schools, including the University of Maryland-Baltimore County and the University of Southern Mississippi.

Some of the technical college’s affected students were also scheduled to receive loan refund checks — the remaining portion of a borrower’s student loan award after tuition costs have been met — ranging from $10 to $4,000.

Students who are eligible to receive the emergency tuition loans and the refund checks — largely used by students to pay for living expenses like housing, food, and transportation — are required to sign a new master promissory note with the school. These students will be expected to repay MATC for the loan if Edamerica does not reimburse the college.

An Edamerica executive who spoke to the Baltimore Sun in August blamed the credit crunch and the economy for the financial problems that have plagued Edamerica and other student loan providers in the federally guaranteed student loan program. According to FinAid.org, a total of 137 of these lenders have exited or suspended their participation in all or part of the Federal Family Education Loan Program, which is made up of private third-party student loan providers.

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Proposed Bailout for Massachusetts Student Loan Authority Uncertain

Student Loan Girl — Sat, 16 Aug 2008 01:42:00 GMT

A third attempt to generate liquidity for the Massachusetts Educational Financing Authority may be too little too late for some 40,000 Massachusetts college students, reports The Boston Globe (“Student Loan Authority May Not Get State Aid,” Aug. 14, 2008).

In late July, MEFA announced that it wouldn’t have enough money to fund any new private student loans this fall after it was unable to launch a bond offering in time.

With proposals from both the state’s governor and treasurer fizzling out, the student loan agency is attempting to raise about $400 million in funds from large investors through a new bond offering on the public market — a deal that, if completed, wouldn’t be finalized until September.

But bonds issued by student loan lenders are having a hard time finding buyers, as investors remain cautious in the wake of the collapse of the subprime mortgage market and the ongoing resulting credit crunch. According to The Boston Globe, the issue of $350 million in student loan revenue bonds just completed on August 7 by the Higher Education Student Assistance Authority of New Jersey was the first successful student loan bond issue since May.

Several Solutions, Few Viable Options

Soon after MEFA announced that it was suspending its private loan program, Gov. Deval Patrick asked that the Massachusetts state pension fund purchase $50 million of the planned upcoming MEFA bond offering, but the request has been rejected by State Treasurer Timothy Cahill. The pension fund’s executive director has said this direct purchase of MEFA bonds would violate the fund’s investment policies.

Cahill has suggested an alternative solution, in which the state would back the MEFA bond offering, using taxpayer funds as collateral. But this initiative would require approval by the state legislature, which isn’t scheduled to meet until October.

Of the ideas lobbied so far as possible ways to help MEFA regain its financial ability to offer student loans, the proposal with the most potential, put forth by some of the state’s colleges and universities, may not go into effect until next year.

This plan would reinstate a participation fund, phased out several years ago, in which schools set aside up to 6 percent of the loan amounts their students take out through MEFA. These stockpiled funds serve as a type of insurance for bondholders and may provide a draw for otherwise reluctant potential investors.

Though most Massachusetts students have already begun pursuing other financing options, Cyndi Roy, the governor’s deputy press secretary, says that the administration is continuing to work with the state’s loan authority.

“Governor Patrick put a serious, viable proposal on the table,” said Roy, “and he remains actively engaged with MEFA on that and any other solutions that will help 40,000 Massachusetts families send their children to college this year.”

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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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Governor Launches Website to Help Massachusetts Families Find Student Loans

Student Loan Girl — Thu, 07 Aug 2008 11:32:00 GMT

Massachusetts Gov. Deval Patrick has set up a financial assistance website to help the 40,000 families who were previously served by the Massachusetts Educational Financing Authority to find a new student loan provider for the 2008–09 academic year, following MEFA’s announcement on July 28 that it was suspending its private student loan program.

The news that MEFA would no longer be offering private student loans came just weeks before fall tuition payments are due and a mere three months after the state agency suspended its federal student loan program, citing the troubled economy and continuing fallout from the collapse of the subprime mortgage market. MEFA’s announcement last week marks the first time in the lender’s nearly 30-year history that it won’t be able to provide any student loans, federal or private.

The governor’s new student loans website gives borrowers an overview of student loans and the different types of student loans still available, provides links for families to compare the interest rates being offered by certain private student loan lenders, and brings together information on scholarship resources.

“It is critical for our students to be able to pay for the colleges of their choosing,” said Gov. Patrick. “I have directed my team to make available a list of resources to help students and their families locate the information they need to finance education this fall and beyond.”

Late yesterday, Gov. Patrick also made a move aimed at restoring liquidity to MEFA, asking the Massachusetts pension fund to invest $50 million in the state student loan agency by buying MEFA bonds — MEFA would use the proceeds from the bond sale to finance new student loans. The governor intends to approach Boston College, Harvard, MIT, and the University of Massachusetts, among other schools in the state, about making similar investments.

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Community Banks May Be an Option for Families Looking to Weather Student Loan Crunch

Student Loan Girl — Thu, 07 Aug 2008 01:17:00 GMT

Although the turmoil in the nation’s credit markets has forced student loan providers, including some big banks, to stop offering federal and private student loans, these lenders’ financial troubles may provide the opening community banks need to get back into the student loan business, according to a guest editorial in The Boston Globe by Douglas Stebbins, managing director of a Boston-based investment banking firm (“A Role for Community Banks in Student Loan Crunch,” Aug. 2, 2008).

Credit unions may be better able to serve families who need student loans, Stebbins says, since community banks generally hold the loans until they’re paid in full, unlike other private lenders who bundle their student loans and sell them to investors in order to get the money they need to make new loans.

Lenders who rely on these sales have seen their traditional sources of revenue dry up, despite recent federal legislation that allows the Department of Education to purchase student loans from cash- strapped lenders in an effort to give them the liquidity they need to continue making new loans.

Community banks, on the other hand, “can provide a financing solution to an underserved population of parents and students,” Stebbins says, “and since these banks know their customers, their loans can be based upon the credit risk of the borrower, not the risk of the securitization marketplace.”

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Borrower Sues Student-Loan Lender for Allegedly Reneging on Its Contract

Student Loan Girl — Sat, 19 Jul 2008 01:03:00 GMT

A student-loan borrower has filed a class-action lawsuit against student-loan lender Northstar Higher Education for allegedly breaking its contract with borrowers.

In the suit, filed Monday with the U.S. District Court in Los Angeles, Northstar is accused of breaking its contract by eliminating its “Total Higher Education Repayment Bonus,” a program that offers borrowers a 0.75-percent interest-rate reduction for 60 days of on-time payments.

Northstar eliminated the program on February 18 of this year, citing the failure of the auction-rate securities used by lenders to finance student loans, according to an article in the Minneapolis Star Tribune (“Student Loan Firm Sued Over End to ‘Repayment Bonus’ Program,” July 16, 2008).

“While Northstar might be facing financial difficulties comparable to other banking institutions, this does not provide it with carte blanche to breach its contractual obligations,” the suit reads.

The suit, filed on behalf of plaintiff Jennifer So, seeks monetary damages and contractual interest-rate reductions for any borrower who had student loans with Northstar on February 18.

The student loan company had not received a copy of the complaint by the time the Star Tribune went to print on July 16, but Northstar’s General Counsel Mark Lindgren said, “Northstar takes it obligations to its customers seriously and believes it has fully complied with the terms of its agreements. In particular, the company has always sought to provide its customers with the benefits from T.H.E. Bonus but has never guaranteed that the bonus would be available under any and all market conditions.”

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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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Community Colleges Eliminate Friday Classes to Help Students Cut Gas Costs

Student Loan Girl — Tue, 20 May 2008 02:54:00 GMT

Several two-year schools with large numbers of commuter students have reduced the length of their academic week from five days to four in an effort to reduce their students’ commute and help them save money on gas.

Making class sessions longer, these schools have been able to cancel classes one day a week, mostly opting for Fridays. This move has allowed their students, who are typically low-income and often work part-time jobs or support families while going to school, to eliminate one round-trip drive out of their weekly schedules.

Meridian Community College in Mississippi recently decided to extend its four-day week — already planned for the summer schedule — into the fall semester as well, according to a story in Inside Higher Ed (“Dropping a Day to Save on Gas,” May 19, 2008).

MCC president Scott Elliot told Inside Higher Ed that 90 percent of Meridian’s students drive themselves to class, and over half of those students commute an average of 30 miles round trip. By his initial estimates, based on earlier gas prices, which have continued to rise, these students will save at least $200 a semester on gas under the new class schedule.

The school plans to try the four-day-week schedule for at least one academic year before evaluating its effectiveness with focus groups and surveys.

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President Bush Signs Legislation That Boosts Availability of Student Loans

Student Loan Girl — Thu, 08 May 2008 16:15:00 GMT

On May 7, President George Bush signed into law legislation intended to help stabilize the $85-billion student loan industry and to avert a predicted shortage in student loans.

The law will allow the U.S. Department of Education to buy bundled student loans that lenders have been unable to sell to investors. Sales of these loans will create capital to help lenders make new loans.

In addition, the measure will allow the Education Department to loan federal money to guarantee agencies, so those agencies can issue student loans, if necessary, under the “lender of last resort” system,” according to an article in The Chronicle of Higher Education (“Bush Signs Student-Loan Bailout Bill Into Law,” May 7, 2008).

The new law is expected to simplify that system, under which students who have been denied student loans can petition the government as a last resort, by allowing the Secretary of Education to designate an emergency lender for an entire school instead of on a student-by-student basis.

Rep. George Miller, D-Calif., chairman of the House education committee and a chief backer of the legislation, said the passage of the bill should send a strong message to the public (“Bush Signs Student Loan Market Stabilization Plan,” Reuters, May 7, 2008).

“With this bill signed into law,” Miller said, “students and families now have every assurance that they will continue to have access to all the federal student loans they are eligible for, no matter what happens in the nation’s financial markets.”

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Lowest-Income Students Need More Pell Aid, Authors of New Report Find

Student Loan Girl — Mon, 05 May 2008 23:35:00 GMT

To help low-income students attend college, larger Pell Grants should be awarded to the most “financially needy” college students, according to a new report (“Window of Opportunity: Targeting Federal Grant Aid to Students With the Lowest Incomes”).

In the report, researchers from the Institute For Higher Education Policy urged lawmakers to increase Pell Grant aid by up to $750 for students who have an expected family contribution (or EFC) that is a negative number. Currently, such students are awarded the same Pell amount as students whose EFC is zero.

The report’s authors concluded that raising the minimum and maximum Pell Grant awards could provide additional aid to the neediest students while ensuring that students with family incomes bordering the eligibility cutoff do not lose their awards.

The proposal to raise Pell Grant awards is gaining traction in the U.S. Senate, according to an article in The Chronicle of Higher Education (“Report Calls for Directing Federal Aid to Neediest Students,” April 28, 2008).

Sen. Edward Kennedy, D-Mass., is backing a proposed measure to boost Pell aid to the lowest-income students as part of a broader bill aimed at dealing with the effects of the credit crunch on the student loan industry.

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Wesleyan University Student-Pioneered Endowment First of Its Kind

Student Loan Girl — Mon, 05 May 2008 17:25:00 GMT

The student government at Wesleyan University in Middletown, Connecticut, has established an endowment that it hopes will eventually eliminate the $270 activity fee required of all students, writes Charles Proctor of The Hartford Courant (“Wesleyan Students Pioneer Endowment Fund,” April 27, 2008).

This endowment may be the first in the country where college students will be solely in charge of making the investment decisions — college administrators will serve in an advisory capacity only, offering guidance on what companies or funds to invest in.

The Wesleyan Student Assembly members hope that in successfully managing the endowment, the student organization will be able operate fully off returns on investment and do away with the student activity fee, which currently pays for the student government’s operations and helps fund other student organizations, Proctor writes.

Wesleyan Assembly President Matthew Ball, the endowment’s brainchild, admits it may take quite a long time to accumulate sizeable returns, but he says that putting the money to use is much better than allowing unused funds to languish, as they have in the past.

Ball hopes that using the endowment to help reduce students’ costs will send a message.

“If we create a way for us to be sustainable without the students having to pay money, it might suggest that universities can do the same thing, or at least look into ways for students to save money,” Ball told The Courant.

The endowment’s creation comes after tuition increases at the school of at least 5 percent for each of the past three years. Tuition is set at $38,364 next year, not including $10,636 to $12,088 in fees for room and board.

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Pennsylvania Student Loan Agency to Cut Grant Aid, Offer Employee Buyouts

Student Loan Girl — Thu, 01 May 2008 00:06:00 GMT

Pennsylvania’s student-loan agency will cut college grant amounts for the 2008–09 academic year by up to $750 and will offer voluntary buyouts to some of its nonunion employees in an effort to keep the company afloat.

The Pennsylvania Higher Education Assistance Agency will determine the adjusted grant amounts based on a recipient’s college costs, family size, and the number of children from the family enrolled in college. Next year’s awards will range from $2,100 to $3,948, compared to this year’s awards which ranged from $2,500 to $4,700.

The agency expects to save $12.5 million annually with the nonunion buyout agreements, after losing more than $37 million in the nine months leading up to March 31, agency spokesman Keith New said in an Associated Press article, (“Pa. Student-Loan Agency to Cut Aid, Offer Employee Buyouts,” April 24, 2008).

During the same period last year, the agency earned nearly $113 million in operating income.

Employees eligible for buyouts will receive two weeks’ pay for each year of service at the agency for up to 16 weeks. The number of buyouts needed to steady the company has yet to be determined and is dependent on the salaries of departing employees.

The agency, which New said has “never before experienced more difficult or severe economic conditions,” will only impose layoffs as a last resort.

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Arkansas Offers State Student Loan Agency $80M Line of Credit

Student Loan Girl — Thu, 24 Apr 2008 23:53:00 GMT

The Arkansas state student loan authority has been tentatively approved for an $80 million loan after an announcement that it may not be able to continue issuing student loans without financial assistance.

The state board of finance, the investment arm of the state treasurer’s office, unanimously approved the line of credit to the Arkansas Student Loan Authority, whose ability to offer student loans has been severely compromised by the nation’s ailing economy, according to an Associated Press article (“Arkansas Offers $80M to Help Student Loan Agency,” April 24, 2008).

At a meeting next month, the five-member board will vote on the final terms and conditions of the loan, which will be issued from state treasury funds that would normally be invested in banks.

Mark Conine, the authority's chief financial officer, told the Associated Press the money would solely be used to issue student loans. The authority issued $70 million in new loans last year.

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Kennedy to Colleges: Have Back-Up Plan for Students

Student Loan Girl — Tue, 22 Apr 2008 00:34:00 GMT

In a letter sent to the American Council on Education on April 15, Sen. Edward Kennedy, D-Mass., the chairman of the Senate Education Committee, urged colleges to sign up for the Department of Education’s Federal Direct Loan Program as a preventive measure against the potential funding inadequacies within the Federal Family Education Loan Program.

His recommendation to colleges and universities to enroll in the direct-lending program as a backup option for student loan funding is yet another one of Kennedy’s attempts to help protect students against a federal funding nightmare this fall.

Kennedy has also introduced the Strengthening Student Aid Act of 2008 into the Senate that would, in part, allow the federal government to inject liquidity into the student loan market and enable the Department of Education to purchase FFELP loans from failing lenders.

Kennedy’s efforts to help secure the federal student loan sector come at a time when almost 50 FFELP lenders have suspended their federal student loan programs in recent months, including 21 of the top originators of federal student loans and five of the largest holders of student loan portfolios, according to FinAid.org.

Several schools had already made the move to the Direct Loan Program before Kennedy sent his letter to the ACE, including Pennsylvania State University, which, at $276 million, has a substantial federal student loan volume. Secretary of Education Margaret Spellings has assured schools that the Education Department is equipped to handle double the volume within the Direct Loan Program, if necessary.

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Kentucky Lender Puts Brakes on Student Loans to New Borrowers

Student Loan Girl — Mon, 21 Apr 2008 21:50:00 GMT

Citing ongoing fallout from the national capital market crisis, Kentucky officials announced the state’s student loan agency will stop making student loans to first-time borrowers beginning May 1 until it can secure additional financing, according to an article by Nancy C. Rodriguez in the The Courier-Journal (“State to Suspend Student Loans to First-Time Borrowers,” April 18, 2008).

The Kentucky Higher Education Student Loan Corp., also known as The Student Loan People, will continue to make student loans for its returning borrowers based on the availability of funds.

In the meantime, the student loan company has asked the U.S. Treasury to allow the Federal Financing Bank to temporarily help the state fund new student loans until confidence in the market is restored.

A few months ago, the state also announced it would be phasing out three loan-forgiveness programs for health care, education, and public prosecutors due to federal cutbacks and overall market instability.

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