Student Loan Blog : student loan lenders

Revised Federal Reserve Plan Could Boost Student Loan Lending

Student Loan Girl — Wed, 11 Feb 2009 23:52:00 GMT

Student loan lenders and holders of student loan securities are set to be among the beneficiaries of a $1 trillion government plan unveiled by Treasury Secretary Timothy Geithner this week to jump-start the credit markets and encourage private sector lending, CNNMoney reports (“$1 Trillion To Boost Lending,” Feb. 10, 2009).

As part of the Consumer & Business Lending Initiative, an expansion of the Bush administration’s $200 billion Term Asset-Backed Securities Loan Facility, the Federal Reserve will commit an additional $100 billion to be used for the purchase of top-rated securities backed by debt, including student loans, auto loans, small business loans, and credit cards. The Obama administration said the program could deliver as much as $1 trillion to public and private sectors to revitalize lending.

Despite skepticism from analysts about the program’s potential to boost activity in the credit markets, Geithner emphasized that the plan is one part of the two key components needed for economic recovery to take effect. The other component would be addressed by the Obama administration’s stimulus bill if it passes.

“It is essential for every American to understand that the battle for economic recovery must be fought on two fronts,” Geithner said. “We have to both jump-start job creation and private investment and we must get credit flowing again to businesses and families.”

The Federal Reserve will use the $100 billion it has committed to the program to offer loans to investors in exchange for securitized collateral — student loan debt included. Investors would be required to provide the Fed with a small portion of the total cost of the securities upfront, before being able to receive the loan from the Fed to buy the securities.

CNNMoney explains, for example, that if a bank issues a batch of securities worth $1,000, a hedge fund investor could give the Federal Reserve $50 in return for a $950 loan that the hedge fund investor would use to buy the bank’s securities. The bank would then recoup its $1,000 investment in the securities, enabling it to make new loans, while the hedge fund would get a new infusion of cash that would have the potential to increase in value if the security’s value goes up.

If the program succeeds in helping to unfreeze the credit markets, which Scott Hoyt, senior director of consumer economics at Moody’s Economy.com says “it certainly has the potential” to do, it may encourage more lenders to return to the student loan market and it may allow student loan lenders to be able to loosen their credit requirements for lending, making it easier for more students to qualify for college loans.

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Student Loan Lending Still Going Strong

Student Loan Girl — Mon, 12 Jan 2009 23:34:00 GMT

Despite being hampered last year by a lack of investors and a lack of access to credit, federal student loan lenders are surviving the economic crisis — making the student loan market one of the few lending industries still able to thrive this year, The Wall Street Journal reports (“Tuition Ammunition: a Happy Lesson on Lending,” Jan. 6, 2008).

Proactive and swift action by the federal government, which guaranteed 18.6 percent more student loans for the 2008-09 academic year than the previous year, has helped the student loan industry avoid the decreases in volume seen by the mortgage and banking industries.

In addition to a move by the Treasury Department to infuse tens of billions of dollars into U.S. banks so lenders could issue new student loans, Congress passed legislation that allowed the federal government to buy up student loan securities from cash-strapped lenders.

The Ensuring Continued Access to Student Loans Act (HR 5715) was intended to help student loan lenders, allowing the government to buy loans directly from these lenders, and may have contributed to a 9.4-percent climb in loan originations for the 2008–09 academic year by lenders in the Federal Family Education Loan Program (FFELP). While the legislation has been in place, the government has purchased about $97 million in student loans and invested nearly $10 billion in student loan trusts, figures that are expected to grow before the end of this school year.

“What we’ve seen so far is that programs we have put in place are having the desired effect,” said Education Secretary Margaret Spellings. Although she’s optimistic that the government’s efforts to boost student lending are working, she said she’s not ready to “declare any victories.”

Credit Markets Hinder Private Student Loan Lenders

While federal student loan lenders seem to be riding out the economic storm, observers say it’s unclear whether the private student loan market, which is suffering greatly from the credit crunch, will experience the same success.

After the market for selling bundled student loan securities dried up, the Federal Reserve initiated a $200 billion program in the hopes of encouraging investors to continue buying these securities. Analysts say, however, that these efforts may not be enough for the private student loan industry to compete with the demand for and the availability of low-cost federal student loans.

Last school year, private student loans accounted for about $17.6 billion, just one-fifth of the $85.9 billion in total student loan lending, according to the College Board. This year, lenders and analysts estimate that private student loan lenders have done 25 percent less business.

Already 39 lenders have stopped making private student loans, and others have tightened their lending criteria, both of which may force financially struggling families to pursue more affordable higher education options, said Tim Ranzetta, president of Student Lending Analytics, an independent research and advisory firm. “The cloud of this financing issue,” Ranzetta said, “will push more [students] to state public universities and community colleges.”

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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 Default Rates In Nevada Rank Among Top In Nation

Student Loan Girl — Mon, 08 Dec 2008 11:55:00 GMT

After ranking number one in the nation for student loan defaults for the last four years, Nevada managed to come in fifth this year with a 7.4-percent default rate based on the Education Department’s data for borrowers who began repaying their loans between October 2005, and September 2006.

To combat the state’s consistently high default rate, state colleges have spent the last six years reaching out to Nevada’s federal student loan borrowers who are late on their payments before they default on their loans, said Sharon Wurm, director of financial aid for Nevada’s public college system (“Nevada’s Rate of Default on College Loans Among Highest In The Nation,” Las Vegas Sun, Nov. 30, 2008).

Because Wurm has found that students feel more comfortable discussing their student loan repayment options with their school than with their lender, her office now contacts borrowers by email, ground mail, and telephone to discuss ways students can avert default, such as economic hardship deferments and forbearances. These options allow students to temporarily stop making payments or make reduced payments on their loans.

“[Nevada’s recent ranking] validates all the hard work that the institutions are doing,” Wurm said.

State Lacks Student Loan Default Demographic Data

While Nevada’s outreach initiative may be helping to improve the state’s default rate, Wurm said the state has limited data on the types of students that typically default and the reasons why so many college students continue to default.

One reason, Wurm suspects, may be the state’s low graduation rate. Currently, just 13 percent of Nevada students graduate from the public college system.

In general, students who attend two-year colleges or for-profit schools that offer certificates tend to have higher default rates because they more frequently drop out of school and typically graduate with lower earning potential than students who graduate from four-year institutions.

At the Las Vegas campus of Kaplan College, a for-profit institute offering one-year programs for medical insurance coding and billing 90 percent of students take out student loans, but about 60 percent of students drop out before graduation and 18.9 percent default on their loans.

The College of Southern Nevada, which only has a 4-percent default rate, has been working to improve its retention rate by contacting students when spotty attendance — one of the most common reasons why students do poorly in their classes — first starts to become a problem. The school’s program directors attempt to contact students by phone, ground mail, or via text message, which has helped absenteeism at the school drop by 13 percent since July 2007.

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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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Massachusetts College Students Lose Funding Source for Student Loans

Student Loan Girl — Tue, 29 Jul 2008 20:41:00 GMT

For the first time in its nearly 30-year history, The Massachusetts Educational Financing Authority won’t be offering student loans this fall to the 40,000 borrowers it serves, according to an article in The New York Times (“Agency in Massachusetts Is Stopping College Loans,” July 29, 2008).

Citing the troubled economy and fallout from the subprime mortgage crisis, MEFA dropped out of the federal student loan business in April, but by June said it would continue to offer private student loans.

The nonprofit student-loan authority, which provided more than $500 million in college loans to Massachusetts students last year, announced on Monday that it would no longer be feasible to offer private student loans. MEFA made the announcement following news that the authority’s bond insurer faced a possible credit-rating downgrade that would have increased the cost of floating new debt.

”It’s really the capital markets. It’s a global situation,” said Jessica Belt, a MEFA spokeswoman. “We’re looking at other options. It’s uncharted territory for everyone, not just MEFA.”

MEFA joins the list of 50 other nonprofit organizations, state agencies, banks, and private lenders that have dropped out of the student lending business this year. Belt says that while it is unclear when the agency will be able to secure new funding, it hopes to rejoin the market in time to help students with their tuition bills for the spring semester.

In the meantime, MEFA has set up a hotline to help families secure other college funding sources.

MEFA will continue to run its other educational programs, including U.Fund, a college savings plan that families can use to pay for tuition, fees, room and board, and books at 80 Massachusetts colleges and universities.

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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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Nursing, Teaching, Law Enforcement, Professions Losing Student Loan Incentives

Student Loan Girl — Fri, 13 Jun 2008 17:30:00 GMT

College graduates preparing to enter critical fields like nursing and teaching may no longer be able to take advantage of programs that previously offered them a break on their student loans.

In at least six states this year, state-affiliated lenders have dropped or scaled back programs that repay or forgive a portion of a borrower’s federal student loans when that student-borrower works in a critical-needs field, according to an article in USA Today (“Credit Crisis Weakens Relief for States’ Student-Loan Programs,” June 11, 2008).

Lenders are also eliminating loan programs that reduce student-loan interest rates for students who major in specific subjects.

These state loan agencies blame a $21-billion cut in government subsidies to lenders who participate in the federal student loan program and the ensuing fallout from the subprime mortgage crisis for making cuts to these incentive programs necessary.

More programs “are certainly at risk should the credit crisis continue,” says Krista Cole of the Education Finance Council, which represents student loan providers in 31 states.

Next month, Mike Reiber of the Pennsylvania Higher Education Assistance Agency, says the agency will stop funding programs for nurses, teachers, child care workers, and members of the military because the “money has literally dried up.”

Student Loan Benefits Being Reduced, Eliminated Nationwide

Other state student loan providers are already reducing or are trimming their borrower benefits for students in critical-needs fields:

The Missouri Higher Education Loan Authority will stop offering reduced student-loan interest rates for teachers, social workers, nurses, law enforcement personnel, firefighters, and National Guard members, beginning July 1.

The Iowa Student Loan Liquidity Corp. plans to cut student loan benefits for new teacher applicants this year.

The Michigan Higher Education Student Loan Authority eliminated a no-interest student loan plan in May for undergraduates majoring in engineering.

The New Hampshire Higher Education Loan Corp. suspended a benefit program in February that forgives some student loans for teachers.

The Kentucky Higher Education Assistance Authority suspended loan forgiveness programs for teachers, nurses, and lawyers in January and plans to reduce loan benefits for current borrowers.

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With Government’s Help, Lenders Returning to Federal Student Loan Market

Student Loan Girl — Thu, 05 Jun 2008 21:08:00 GMT

A number of lenders who abandoned the federal student loan market in recent months may be returning, in light of a new law designed to keep struggling lenders afloat, according to a Dow Jones Newswires article.

Many of the 102 companies that scaled back or withdrew from the Federal Family Education Loan Program, in which federal student loans are funded by private lenders, are expected to at least consider returning to the program for the 2008–09 academic year, writes Dow Jones reporter Melissa Korn (“Student Lenders Tiptoe Back to Market With Government Bailout,” June 4, 2008).

Brett Lief, president of the National Council of Higher Education Loan Programs, said every one of the lenders in his organization "changed their policies" during the credit crunch earlier this year — reducing or suspending their participation in the FFEL program. The 60 FFELP lenders that are members of the NCHELP reported that the changes were necessary because federal student loans were no longer profitable.

But after Congress passed the Ensuring Continued Access to Student Loans Act (HR 5715), which gives the U.S. Department of Education the authority to buy student loans from lenders who have been unable to sell them, those lenders are “all reviewing their policies again,” Lief said.

Before the passage of the act, Sallie Mae, one of the nation’s largest originators of federal student loans, was considering whether to remain in the FFEL program, and Nelnet, NorthStar Education Finance, Inc., and the Kentucky Higher Education Assistance Authority had left the FFEL program.

Under the new legislation, all four of these lenders have reaffirmed they will continue to issue new federal student loans. However, some lenders still question whether the government changes will ultimately be profitable despite the Education Department’s infusion of liquidity, while other lending banks, like Citibank, JPMorgan Chase, PNC, and SunTrust, remain unmoved.

These banks no longer offer student loans to certain colleges — schools that they have determined tend toward higher default rates, fewer borrowers, and smaller loan amounts that make business less profitable.

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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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College May Be Stripped of Its Ability to Offer Some Federal Student Loans

Student Loan Girl — Thu, 29 May 2008 20:36:00 GMT

The federal government is considering revoking a college’s ability to offer subsidized federal student loans — namely Perkins and Stafford loans — as allegations surface that the school, Technical Career Institute, has been paying off the loans of some of its own students.

Since October 2005, TCI, a for-profit college in New York City, has allegedly paid $440,000 to student loan lenders in an effort to improve its default rating, according to the U.S. Department of Education’s Inspector General.

TCI, which is owned by EVCI Career Colleges Holding Corp., paid off the student loans and then later attempted to collect the debt from students.

Under federal law, colleges face penalties, including the loss of eligibility to participate in the federal student loan system, if too many of their students default on their government-subsidized loans, writes Chronicle of Higher Education reporter Paul Basken ("College Faces Penalties for Paying Students’ Loans," May 30, 2008). Colleges, however, are not allowed to pay off those student loans to help their institutions avoid a poor default rating.

In response to the Education Department’s findings, TCI denies wrongdoing, saying its actions did not hurt students and asserts that Education Department officials were aware of TCI’s student loan practice and that officials “did not communicate any concerns” about the practice, Basken writes.

The inspector general said the Education Department’s guidance to the institute was not definitive on that point.

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