Another Student Loan Crisis?

It was an afternoon in May when Bill Spiers got the call. As financial aid director at Florida's Tallahassee Community College, he'd been expecting it for some time now. "Loan crisis goes to college," CNN blared. "Credit crisis hits students," The Boston Globe ran.

"Bill?" It was the local Chase representative on the line: "I have some bad news for you."

For months, like financial aid administrators around the country, Spiers had braced himself for the fallout of the sub-prime mortgage crisis, waiting for it to impact the student loan industry. "There was almost this level of panic," Spiers remembers. "People thinking, 'What's going to happen to us?'"

Now he had the beginning of an answer. Chase was cutting off federal loans to his school, refusing to lend its students money. In the weeks to come, Wells Fargo, Key Bank, SunTrust, and Citibank would all follow suit.

Throughout the spring, stung by investor wariness over the sub-prime mortgage meltdown, sales of asset-backed securities -- the source of liquidity for many student lenders -- contracted. As a consequence, some student lenders were "completely unable to obtain capital to make loans," says Bob Murray, spokesman for USA Funds, the largest guarantor of federal student loans. "Or they were having to pay significantly more than they were used to." Factor in the $19 billion industry-subsidy cut Congress approved in September 2007 -- after the discovery that lenders were bribing financial aid officers sparked national outrage -- and the ranks of lenders participating in the Federal Family Education Loan (FFEL) program, through which lenders like Chase provide capital for federally backed loans, were thinning. Hence the ensuing fear of a student loan "crisis" -- which, as it turns out, was more of a lender-inflated narrative (picked up by overly breathy media) than it was a real threat to students nationwide.

What angered Spiers was that lenders like Chase weren't cutting off FFEL loans to students at all schools -- just ones attending those they deemed a special risk, such as community colleges like his. "These are government-backed lenders conducting discriminatory practices," he says. "I was very disappointed."

But today, he's also relieved. Even as some lenders are spurning community colleges and for-profit and less competitive universities -- or have stopped making loans entirely -- others have picked up the slack. While 130 lenders have exited the FFEL program, those lenders were responsible for only 12.3 percent of Stafford and PLUS loans. Roughly 2,000 lenders continue to participate (though the top 50 originate 83.5 percent of all loans). At this point, says Murray, while students may have to juggle lenders, "it looks like anyone who's eligible and wants to take out a federal student loan will be served this academic year."

That includes students at Tallahassee Community College, where Spiers reports that though the school's federal lender list has shrunk in half, no students have experienced trouble getting loans.

Given talk of a student loan "crisis" that proliferated this spring, the current response on campuses is, overall, remarkably staid. "We really haven't heard anything unusual from students," says Cathy Simoneaux, financial aid director at Loyola University-New Orleans. While some lenders have cut back, she reports, others have stepped in to fill the void.

In Arizona, asked what kind of reaction students at community colleges in Maricopa county have had, Ellen Neel, who directs financial aid at Glendale Community College, sounds nonplussed. "None at all," says Neel, who recently stepped down from her position as head of the Arizona Assoc. of Student Financial Aid Administrators. "They say, 'Okay, fine, I have to choose a different lender -- that's all."

That's because the idea of a student loan 'crisis' was always a fabrication, says USPIRG's Luke Swarthout.

"Our student loan structure is built on an extensive network of safeguards and built-in alternatives," explains Swarthout. To begin with, Swarthout notes, should a serious number of lenders leave FFEL -- which serves about 80 percent of students receiving federal loans -- schools can opt to get loans directly from the U.S. Treasury through the Direct Loan program (this year, 348 schools have switched from FFEL to DL). According to the Department of Education, the DL program is currently prepared to double its lending capacity; senators like Edward Kennedy are pushing for its expansion.

Federal loans are enough to bear the brunt of tuition for nearly 90 percent of students who borrow to finance their education. Nationally, over 75 percent of students attend either public four-year institutions (at an average annual $13,600) or community colleges ($2,300). Apart even from grants, any student -- regardless of income -- can receive up to $31,000 during undergraduate study in unsubsidized Stafford loans. Families also have the option of parental PLUS loans, which can cover up to the full tuition cost at any accredited school. If a parent is denied a PLUS, a student's overall Stafford limit rises to $57,500.

That doesn't mean there isn't a student loan access problem. It just exists for a narrower population -- namely, students who attend schools with the highest tuition bills and are used to depending on private loans. Typically, these are students attending costly proprietary schools or private universities, where about 16 percent of students seek out private along with federal loans. "Those loans are harder to get now, and more expensive," says Maureen Budetti, student aid policy director for the National Association of Independent Colleges and Universities. Many lenders who make private loans, like Sallie Mae, have imposed tighter credit checks, while others have ceased such lending altogether. Nevertheless, Budetti reports that only a "small percentage" of borrowers have been affected. Mark Kantrowitz, who publishes FinAid.org, puts that estimate at 1 to 2 percent, or about 100,000 students.

But even students having trouble with private loans may have other options, like getting a co-signer to help obtain a loan, which will also, typically, net better interest rates as well. And then there's the fact that -- as Robert Shireman, director of the Project on Student Debt, points out -- about 75 percent of private borrowers never max out on their federal options in the first place.

One reason is lack of awareness about those choices. "I didn't understand the difference between federal and private loans, and my counselor never really explained it to me," says Blaine LaBron, who attended Pepperdine University without fully using his federal loan eligibility, graduating in 2006 with $95,000 in private debt. Since graduating, combining high variable interest rates, origination and late fees, that figure has ballooned to $125,000.

According to Harris Miller, director of the Career College Association, the complexity of the FAFSA application is another factor. At least some of the spike in federal aid requests over the past year -- applications have jumped 17 percent -- is likely because "since the online private approval process is harder now, people are finally using their full range of options," says Miller.

Even in Massachusetts, where the Massachusetts Educational Financing Authority suspended private loans to 40,000 students in July, officials sound fairly sanguine. "The vast majority of our schools report a very small number of students who still need loans at this time," says Richard Doherty, who heads the Association of Independent Colleges and Universities in Massachusetts. According to an August AICUM poll, 70 percent of their members have had less than 15 students experience difficulties in obtaining private loans. Only a "tiny percent" reported over 50 students with similar problems.

To be honest, says Doherty, the notion of a student loan "crisis" was "perhaps overplayed" by the media.

Michael Dannenberg, Senior Fellow at the New America Foundation, agrees. "People were running around, saying the sky is falling, that kids are going to go without federal student loans, but the DOE never said that," says Dannenberg. "Quite the opposite. Because, in truth, there never was a real crisis for students when it came to federal student loans."

"There was, however, a real crisis for some lenders who weren't able to access capital at the same low rates they'd been used to," he adds.

In many ways, the long-standing political tension between the FFEL and DL programs is what undergirded talk of "crisis" this spring. Because the DL program, unlike FFEL, makes its loans directly from the U.S. Treasury, it isn’t subject to the vagaries of the asset-backed security market. Meanwhile, because it cuts out the middleman, for taxpayers, the DL program is less costly as well -- about five times cheaper per loan, according to the Government Accountability Office. But for lenders like Chase and Sallie Mae, who profit heavily from low-risk, government-guaranteed loans, it means lost business. And for lenders, it was easier to hype up talk of a crisis (with the hope of reinstating past subsidies) than allow for renewed attention to the DL program.

Certainly lenders had a role in contributing to a mood of panic. This spring, for example, Sallie Mae (which was fully privatized in 2004) warned it might leave the FFEL loan program altogether -- a gesture Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admission Officers, dismisses as an obvious stunt. "Sallie Mae threatening to give up their student lending business is about as credible as Starbucks threatening to leave the coffee business," says Nassirian.

"It may not have been credible, but it certainly was effective," says the Project on Student Debt's Shireman. In May, after state agencies in Michigan, Massachusetts, and Pennsylvania announced plans to temporarily suspend federal loan-making, Congress passed the Ensuring Continued Access to Student Loans Act, which -- among other moves -- authorized an industry rescue plan offering lenders low-interest lines of credit and the chance to sell their loans to the government at an above face-value rate.

For lenders, says Alan Collinge, founder of Student Loan Justice, the credit crunch was "convenient," to say the least. "It helped change the debate away from the more predatory nature of the industry," he says, citing how lenders have in the past won exemptions from the Fair Debt Collection Practices Act and in 2005 persuaded Congress to remove private loan bankruptcy protections.

Shireman, however, is measured in his appraisal of Congress' overall response. "I thought it was about right," he says. Apart from the Act's efforts to cushion lenders, it also authorized PLUS loan payments deferrals and expanded the Stafford loan limit. "It protected the federal fiscal interest without heaping a lot of additional subsidies on lenders, which was a real danger," he says. "And students are getting their federal loans."

As for the private loan crunch, LaBron -- whose monthly debt payments total $1,200 -- says that had he known how much private debt would cost him in the end, he would've made other educational choices. "I haven't even framed my diploma yet, because all I see is a $125,000 IOU," he says. "I think those kids are lucky. Think of the alternative -- they could end up like me."