Student Loan Blog : private lenders

The Plot Thickens for the Future of Student Lending

Student Loan Girl — Tue, 14 Apr 2009 00:00:00 GMT

It’s “all hands on deck” for federal student loan lenders. The banks and third-party student loan providers that make up the Federal Family Education Loan Program have made it abundantly clear that they’re not going to roll over and accept the terms of the Obama administration’s proposal to axe their loan program in favor of the Education Department’s Direct Loan Program without a fight, The New York Times reports (“Plan to Change Student Lending Sets Up a Fight,” April 12, 2009)

“We can either meet or beat the budget savings that are in the president’s budget with the exact same system that we have got working now with maybe a few tweaks,” said Albert Lord, chief executive of Sallie Mae, the largest student loan provider participating in the FFEL program.

According to Congressional Budget Office calculations, establishing the Direct Loan Program as the sole provider of federal student loans is projected to save the government $94 billion over the next 10 years, savings that President Obama has said would be funneled directly into the federal Pell Grant Program for low-income students.

Lender-Proposed Alternatives Come Up Short

Lord and other FFELP lenders who oppose the administration’s plan are pushing for a compromise between the Obama plan and the current system that would allow them to continue offering students valuable lending services — quality customer relations, billing, and default prevention and collection — and still achieve Obama’s goal of saving taxpayers money.

FFELP lenders say such dually-beneficial partnerships are possible, which can be evidenced by a compromise that Congress approved last year that allows FFELP lenders to originate student loans using federal money and to resell the loans back to the government. FFELP lenders, which provide more than $56 billion of the nation’s federal student loans, were able to continue making loans to families and the government was able to ensure that families still had access to federal student loans.

But the savings Sallie Mae projects under its compromise plan still only add up to about 82 percent of the president’s savings goal over the next five years.

Supporters of the president’s plan say that this savings shortfall, as well as the fact that FFELP lenders are still relying on the government’s help to retain lending capital, raises the question, “why do we even need private lenders,” asked Representative Timothy Bishop, D–N.Y., a former provost of Southampton College.

Bishop argues that expanding the Direct Loan Program, which provides federal student loan funds directly to more than 1,500 schools is “obvious and long overdue,” being that over the last few decades private lenders have earned huge profits at relatively no risk because the government guarantees repayment up to 97 percent.

Factional In-Fighting Could Favor Lenders

In addition to battling lenders, lawmakers are also fighting an internal battle. Republicans say Obama’s plan is just another means to expand government control over the private sector, while Democrats are divided, with some legislators favoring the plan while others, who represent districts that rely heavily on student loan providers for employment, are siding with private lenders.

Allen Boyd, D–Fla., argues that the president’s proposal could jeopardize thousands of jobs across the country, including 650 in his own district, at a time when unemployment is already rampant. And the states that administer loans through state-based guarantee agencies, considered quasi-government entities that benefit the same as private lenders, are fighting to retain their lending business.

To help keep these quasi-government agencies afloat if they lose their FFELP business, the Obama administration has proposed spending $500 million a year on these agencies’ financial literacy programs and services.

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Aid Administrators to Lawmakers: “Don’t Kill Guaranteed Student Loans”

Student Loan Girl — Wed, 25 Mar 2009 00:02:00 GMT

Just as Congress is about to vote on President Obama’s plan to end the government’s Federal Family Education Loan Program, through which families get their student loans from private third-party lenders, a lender advocacy group is urging lawmakers to consider an alternative to the president’s proposal, reports The Chronicle of Higher Education (“Student-Aid Administrators Urge Lawmakers to Reconsider Killing Guaranteed Loans,” March 19, 2009).

Currently, college students can take out student loans through private lenders using the FFEL program, or directly from the Department of Education through the government’s Direct Loan Program, which Obama hopes to establish as the sole provider of federal student loans.

Instead of doing away with FFELP lenders altogether, the National Association of Student Financial Aid Administrators proposes creating a new federal student loan model that would allow FFELP lenders to continue their participation in the federal student loan program, but under different roles.

FFEL Program Participants Would Serve New Roles

In a memo sent to Congress, NASFAA president Philip R. Day Jr. proposes that student loans be financed through the sale of government subsidized bonds to investors and that the proceeds be used to disburse student loans to colleges, who will in turn apply the funds directly to students’ accounts, similar to how direct lending functions today.

Under the NASFAA’s proposal, private lenders would no longer market college loans to students but could bid on Education Department contracts that would allow them to originate, disburse, and service the loans. Nonprofit agencies and former guarantors would no longer guarantee student loans, but would instead provide default- management services to students, including entrance and exit counseling on their repayment options.

A unique feature of NASFAA’s proposal would allow family members, friends, and private companies to receive a tax credit in exchange for paying off a portion or all of a borrower’s debt. State-based nonprofit lenders would still be allowed to offer loan-forgiveness programs for students entering in-demand professions.

Congress Urged to Consider Alternatives

Earlier last week, the NASFAA asked lawmakers to go slow when considering Obama’s plan. Lawmakers were also urged to engage in “deliberative” discussions regarding the future of student lending, The Chronicle reported, instead of just “ramming through” the government’s proposal to end the guaranteed lending program.

Obama’s plan aims to eliminate guaranteed lending for students through a budget resolution outlining the government’s spending plan.

If that resolution includes instructions to Congress’ education committees to consider Obama’s proposal by way of the budget reconciliation process, Day says it would be the death knell of the FFEL program and “prevent a full vetting of alternative proposals.”

The NASFAA has asked legislators to convene a stakeholder’s meeting to consider other viable options to reform the federal student loan program.

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74% of Sallie Mae Loans Could Disappear Under Obama Plan

Student Loan Girl — Thu, 12 Mar 2009 19:21:00 GMT

Sallie Mae — the largest provider of college student loans in the country — may ultimately see three quarters of its student loan business evaporate under a plan by President Obama that would end government subsidies to third-party lenders and establish the federal government as the sole provider of federal student loans, reports Bloomberg.com (“Sallie Mae May Lose 74% of Loans Under Obama Budget,” Feb. 27, 2009).

Last year, the student loan giant made a total of $24.2 billion in student loans, with $17.9 billion, or 74 percent, backed or subsidized by the federal government.

If Obama’s plan is approved, students would no longer get their federal student loans through private third-party lenders participating in the Federal Family Education Loan Program — which currently provides the bulk of federal student loans to college students — and would instead get their federal student loan funds directly from the government through the Direct Loan Program.

The government’s new plan — a plan that financial analyst Matt Snowling of financial services firm Friedman, Billings, Ramsey & Co says has “blindsided” the student loan industry — threatens to reduce Sallie Mae to a debt collector and servicer for the government.

However, Sallie Mae isn’t likely to protest Obama’s new student loan strategy, says William Ryan, an analyst at Portales Partners, LLC, a New York-based stock rating service, since the lender is bidding on a contract to become the government’s servicer of student loans. That contract could bring in $250 million over four years according to analysts’ estimates.

While Education Secretary Arne Duncan has said that switching to government-funded student loans could save the government as much as $4 billion per year, Snowling says that the move could vastly alter the student loan marketplace, making borrowing much more difficult for students.

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Program to Offer NY Students Low-Cost College Loans

Student Loan Girl — Wed, 17 Dec 2008 23:36:00 GMT

Despite New York’s $15 billion budget deficit, Gov. David Paterson announced he is creating a student loan program that would allow New York college students to borrow $350 million in low-cost private student loans directly from the state, reports The New York Times (“Governor to Unveil a Low-Cost Student Loan Program,” Dec. 15, 2008).

State officials say the new student loan program, meant to help the state “retain the best and the brightest young minds,” will offer lower rates than most private student loans — potentially as low as 8 percent. Interest rates will be adjusted annually based on market conditions.

Paterson plans to allocate $50 million in state funds to jumpstart the program and $10 million each year thereafter — a key recommendation of the Commission on Higher Education. The commission studied New York’s higher education system for more than a year and found that the state’s 1 million college and graduate students had taken out $2 billion in private loans, and that those students often paid as much as 12 percent on their loans, double the interest that students paid in states with low-cost student loan programs.

Paterson hopes the loan program will help ease the financial challenges that face students now that lenders have tightened their credit criteria and as public and private colleges consider tuition increases to cope with state budget cuts. To help balance the state budget, Paterson has proposed increasing tuition at the City University of New York and the State University of New York.

“One of the big problems in the student loan program is that it is drying up,” said Jeffrey Gordon, a spokesman for the budget division of the governor’s office. “People who were able to get loans last year can’t get them this year.”

Under the loan initiative, students at two-year colleges would be eligible to take out a maximum of $20,000 in loans, while undergraduates at four-year institutions could borrow up to $50,000. New York students pursuing both an undergraduate and graduate degree would be capped at borrowing a combined total of $70,000 in private student loans.

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Student Loan Providers Get More Help From the Government

Student Loan Girl — Thu, 13 Nov 2008 22:39:00 GMT

In a move intended to avoid a shortfall in student loans next year, Congress has expanded the government program to buy federally guaranteed student loans from private lenders.

Under the updated loan-purchase plan, the Education Department can now buy lenders’ student loans with origination dates between Oct. 1, 2003, and July 1, 2009, The New York Times reports (“U.S. Buying More Loans to Students,” Nov. 8, 2008). The original buyback parameters only allowed lenders to purchase loans made for the current academic year and for the 2009–10 academic year.

Federal officials say that as much as $60 billion in student loans may be eligible for purchase under the new expansion.

“We were able to provide stable, reliable funding for students this school year,” said Education Secretary Margaret Spellings. Now the government is taking action to avoid problems in student loans for next year, she said.

Expanded Program May Solve Liquidity Problem

Many lenders were initially unable to participate in the student loan buyback program because the original version of the program only allowed lenders to sell loans on the secondary market that were generated prior to 2008.

The economic conditions during the current academic year have made it difficult for lenders to secure the financing needed to make new student loans that would be eligible for sale through the buyback program. Unable to sell their loans, lenders were then forced to carry their loans on their books.

“They have these government-guaranteed loans and nobody wants to fund them,” said Sameer Gokhale, a financial analyst for Keefe, Bruyette & Woods in New York. “The government is agreeing to buy more of the loans to give more liquidity.”

The Education Department hopes that the new initiative will provide lenders with the required funds to generate new federal and private loans next year, as lenders may be more likely to participate in the program once they can free up billions of dollars in loans under the new requirements of the buyback program.

“We need to do everything we can to prevent students from becoming the next victims of the financial crisis,” said Sen. Edward Kennedy, chairman of the Senate Education Committee. “Next year, we need to take a closer look at these programs to insulate them from fluctuations in the market so students’ ability to access loans is not threatened.”

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Student Loan Crunch Affected Some Private Schools, But Crisis Largely Avoided

Student Loan Girl — Tue, 28 Oct 2008 20:59:00 GMT

The student loan crunch that began this past spring failed to become the widespread crisis that experts predicted, according to the results of a survey by the National Association of Independent Colleges and Universities. Still, the NAICU reports, some of the private colleges surveyed have had to scramble to help their students get the loans they need to pay for school (“Student-Loan Crunch Sets Back Some Private Colleges, but Most Manage,” The Chronicle of Higher Education, Oct. 22, 2008).

More than 500 NAICU member institutions responded to the survey, including 450 private colleges and universities that participate in the Federal Family Education Loan Program, the federal student loan program that relies on private, third-party lenders to provide the majority of federally backed loans to students. Of those schools, 85 percent found that their students were dropped by at least one private lender, and 27 percent of the schools said that their students had struggled to find a replacement lender.

Schools reported that their students who weren’t able to get a private student loan often had to take time off from school, drop down to part-time status, work additional hours, or use a credit card to make up the difference in their college expenses.

Three-quarters of the colleges surveyed saw an increase in demand for student aid, but 67 percent reported no negative impact on their enrollment. This is “a good sign,” said David Warren, president of NAICU, even though he speculates that many families may had not yet felt the full impact of the downturn when they were surveyed on Sept. 10., only days prior to the Lehman Brothers bankruptcy filing.

“On the one hand, we avoided anything we’d call a crisis,” Warren said. On the other, we see some clear signals of what may be in store for families right on the edge.”

Only 18 percent of respondents said they had fewer returning students than anticipated, while 19 percent reported having a smaller freshmen class than expected, which came as a surprise to Sarah Flanagan, NAICU’s vice president for government relations and policy. “I thought our sector was going to be OK.”

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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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Student Loan Providers May Get Government Help for One More Year

Student Loan Girl — Thu, 18 Sep 2008 00:08:00 GMT

With problems in the credit markets continuing to plague student loan providers, the U.S. House of Representatives overwhelmingly approved a year-long extension of the Ensuring Continued Access to Student Loans Act, which allows the secretary of education to buy student loans from cash-strapped lenders.

If approved by the Senate, the measure, which Congress originally passed last spring, would extend the education secretary’s loan purchasing power through July 1, 2010 to help ensure that students have access to federal student loans for the 2009–10 academic year. The bill was set to expire July 1, 2009.

The act gives the Department of Education the authority to buy student loans from third-party private lenders in the Federal Family Education Loan Program who have been unable to sell their loans to investors following fallout from the subprime mortgage crisis.

“Our rough economy is already dealing a huge blow to American families and we can’t allow trouble in the credit markets to further price students out of a college degree,” said Rep. George Miller, D-Calif., chairman of the Committee on Education and Labor (“House Moves to Protect Student Loans,” Associated Press, Sept. 15, 2008).

“With market conditions showing no signs of letting up,” Miller added, “it’s only prudent to make sure that students have every assurance that the federal student loans they need will be there next year.”

The measure would also extend the secretary’s authority to advance federal funds to guarantee agencies so those agencies can make loans, if necessary, as a “lender of last resort” for the nation’s colleges and universities.

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Survey Shows New England Families Can Still Access Federal Student Loans, Despite Loss of Lenders

Student Loan Girl — Thu, 11 Sep 2008 22:29:00 GMT

According to a regional survey of financial aid officers from 214 New England colleges and universities, students and parents have had few problems accessing federal student loans this year, but financial aid administrators have lingering doubts about how easily students will be able to secure college loans next year (“Student Loan Availability Survey of New England Colleges & Universities,” The New England Council, September 2008).

The survey, conducted by the New England Board of Higher Education and The New England Council, asked financial aid officers to describe how New England families fared following federal legislation that Congress passed in May to help families pay for college.

The legislation was designed to ensure that families still have access to federal student loans as private, third-party lenders — crippled by fallout from the subprime mortgage crisis that dried up traditional sources of funding and hurt by legislation that cut $21 billion in their federal subsidies — continue to drop their federal student loan programs.

To date, 104 of these lenders have stopped participating in the Federal Family Education Loan Program, through which borrowers take out their federal student and parent loans from third-party lenders rather than through the federal government.

Although some families were forced to find a new student loan provider after their former lender suspended its federal student loan programs, New England financial aid officers indicated that borrowers have not been deterred from seeking FFELP loans.

In fact, the survey revealed, more parent borrowers are seeking federal PLUS loans through FFELP lenders this fall and more students are taking out unsubsidized federal Stafford student loans.

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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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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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Education Department to Pay Lenders Full Value for Student Loans

Student Loan Girl — Wed, 21 May 2008 22:56:00 GMT

The U.S. Department of Education has released details of how much it will pay private lenders in the Federal Family Education Loan Program who sell their loans to the government instead of to capital-market investors, according to an article in The Wall Street Journal ("Bush Will Use Treasury Funds to Bolster Student Loan Market," May 20, 2008).

Under the new authority granted to the Education Department by the Ensuring Continued Access to Student Loans Act" (H.R. 5715), the government can buy loans from private FFELP lenders until Sept. 30, 2009.

In return, these lenders will receive the full principal value of the loan along with accrued interest, a rebate of any loan origination fees paid to the government, and a $75 payment, WSJ writer Robert Tomsho reports.

In an effort to reassure lenders who typically have relied more heavily on the securities markets for their lending capital, the government also plans to invest in newly created trusts that hold federal student loans made by private lenders.

"In effect, the government will reimburse such lenders for the full cost of such loans in return for payments from the trust equal to commercial paper interest rates, currently about 2.6 percent, plus an additional 50 basis points," Tomsho writes.

However, financial details of the plan could change if the federal Office of Management and Budget determines the loan-purchasing plan does not meet the act’s requirement that such measures be cost-neutral.

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Two Purdue University Campuses Make the Switch to Direct Lending

Student Loan Girl — Tue, 20 May 2008 16:35:00 GMT

Beginning this fall, Purdue University’s West Lafayette and North Central campuses will become direct lending schools.

According to a press release issued by Purdue, the two campuses will offer federal student loans only through the U.S. Department of Education’s Direct Loan Program, under which students and parents will borrow directly through the Education Department (“2 Purdue Campuses Shift to Federal Direct Loan Program,” May 12, 2008).

The move marks a departure from the schools’ past ties to private lenders in the Federal Family Education Loan Program.

Pamela Horne, Purdue’s assistant vice president of enrollment management and dean of admissions, said the school made the switch to offer borrowers stability in a turbulent student loan credit market.

“We worked to identify sources for student loans that can provide stability and predictability to our families with a minimum of disruption,” she said.

More than 23,000 Purdue West Lafayette students and 5,500 parents borrowed $125 million in federal college loans during the 2006–07 academic year. During the same time frame, 5,118 students and 108 parents at the university’s North Central campus borrowed $9 million in federal student loans.

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