Student Loan Blog : federal student loan lenders

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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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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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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