For the fifth year in a row, federal Pell grants for lower-income students will be funded at the same level—$4,050.
Two-thirds of graduating seniors now borrow to pay the bills, while in 1993 less than half did so. The average debt burden for these graduates is $19,200, more than twice what it was a decade ago, according to The Project on Student Debt, a non-profit advocacy group.
The combination of higher interest rates, stagnant Pell grants and escalating college costs will increase the student debt burden substantially, according to many observers who follow student financial aid developments.
"It's very clear that in the short run—that is, over the next five years—students will bear the burden of the (budget) cuts," said Sam Kipp, president of EdFund, the student loan services auxiliary of the California Student Aid Commission. "The long term is much less clear. It depends on how high the variable rate would have gone without this legislation."
"I agree this makes it tougher on students," said Brett E. Lief, president of the National Council of Higher Education Loan Programs, which represents guarantee agencies and non-profit lenders. "I also think this will scare more low-income students away from higher education."
Said Luke Swarthout, a higher education associate at the Public Interest Research Group, "The bottom line is that Congress took $12 billion from the loan programs to pay for other things at the worst possible time. Tuitions are rising fast, the nation needs more college-trained people, and there is increasing evidence that one needs a college degree to lead a middle-class life."
Initially, changes in the loan programs were being studied as part of reauthorizing the Higher Education Act of 1965, a leisurely process that began three years ago. However, as the federal deficit soared, "most plans to reform the student loan programs were swept aside, and the loan programs became a deficit reduction target," said Becky Timmons, director of government relations for the American Council on Education. "We were on the students' side on this one—why not reduce lenders' subsidy further, instead of hiking student interest rates?"
The legislation that emerged, and that is now law—the Deficit Reduction Act of 2005—is not entirely unfavorable to students. In addition to increasing Stafford loan limits, Congress voted to phase out the three percent "origination fee" that has been added to federal loans. Also, graduate students now are eligible for the PLUS loans that previously were available only to parents of undergraduates. And two new grant programs were established for lower-income students who are proficient in math and science.
Banks and other for-profit lenders also came in for some Congressional trims. "We are definitely worse off" because of the legislation, said John Dean (not the John Dean), special counsel for student loan programs at the Consumer Bankers Association.
Dean said elimination of the origination fee will reduce lender revenue (although many banks already were offering "no-fee" loans). Overpayments on student loans, which have been pocketed by lenders, will go to the federal government in the future. The Congressional Budget Office estimates that these overpayments will amount to $13 billion over the next five years.
The rate at which the government repays lenders on defaulted loans will drop slightly—from 98 percent to 97 percent, but that lost revenue is likely to be recovered many times over by the increased interest rates on federal loans, many experts believe. The national default rate is currently 4.5 percent, based on data from 2003, the most recent year available.
"The legislation's impact will be very light on lenders," said Mark Kantrowitz, publisher of finaid.org, a website about student aid. "You can tell what they think by what they're telling their investors, and what they're telling them is that the impact won't be very great."
The legislation is kinder to lenders than it is to students partly due to the efforts of Ohio Republican John Boehner, who steered the bill through Congress in his role as chairman of the House Education and the Workforce Committee. Boehner since has risen to be majority leader of the House of Representatives.
"The lenders have a very good friend in John Boehner," Mark Kantrowitz said.
At the annual meeting of the Consumer Bankers Association last December, Boehner told the assembled lenders, "Know that I have all of you in my two trusted hands," The Chronicle of Higher Education reported.
A Chronicle investigation found that Boehner's political action committee received $172,000 in contributions from lenders and loan consolidators during the 2003-04 election cycle. More than $100,000 of that came from Sallie Mae, which once was a government-sponsored enterprise but now is a highly successful private, for-profit company that both makes and guarantees student loans and also owns a loan default collection agency, among many other enterprises.
With a sales force of 400 and a powerful Washington lobby, Sallie Mae dominates the student loan industry. Its net income increased from $465 million in 2000 to $1.9 billion four years later, according to a Fortune magazine article last December. Al Lord, former Sallie Mae CEO, was paid $225 million in salary and stock options from 1999 to 2004, the magazine also reported.
Sallie Mae now is attempting to buy the loan portfolios of some non-profit state agencies, which critics say will result in poorer service and higher rates for students. As it is, "students are entering the economy a slave to Sallie Mae," Joshua Chaisson, a student at the University of Southern Maine, recently complained at a hearing of the Secretary of Education's Commission on Higher Education.
Representative Boehner has denied that he has been influenced by campaign contributions from the student loan industry. And Sallie Mae lobbyist Tom Joyce told the Chronicle of Higher Education, "We are interested in supporting candidates on both sides of the aisle who understand the importance of the federal student loan program."
However, Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, told the Chronicle, "One can't help but see Sallie Mae's imprint on the substance of the legislation that Mr. Boehner's committee has produced."
It seems to be hard to lose money in the student loan business. Loans from banks and other lenders are guaranteed by state agencies (like California's EdFund) or other guarantors. If a student defaults on the loan, the guarantor pays off the loan, and the federal government reimburses the lender or the guarantor for at least 97 percent of the loss and also guarantees a certain rate of return.
"This is a classic example of corporate welfare," said Richard W. Black, associate vice chancellor for admissions and enrollment at UC Berkeley. "Lenders pocket the interest and collect from the feds if the loan is defaulted. It's well-structured corporate welfare."
But there is no equivalent welfare system for student borrowers, their parents and others who pay the bills.
Average debt for undergraduates has more than doubled in the last decade, according to the Project on Student Debt. For graduates of four-year public institutions, average debt levels have risen to $18,000, accounting for inflation. For graduates of four-year private schools average debt levels are more than $20,000.
Sixty percent of graduate and professional students borrow, with an average cumulative debt of $37,067, according to the finaid.org website. Average debt ranges from $26,895, for those seeking master's degrees, to $113,661 for medical students.
The Project on Student Debt also reported that 25 percent of graduating seniors in 2004 owed at least $25,000, and many owed $40,000 or more. The College Board reported that higher-cost private loans increased from ten percent of total borrowing to 18 percent in the last six years, as undergraduates reached the $23,000 maximum allowed for Stafford loans.
"In the student loan industry's own estimate, 39 percent of student borrowers have an unmanageable debt burden after college," Anya Kamenetz, author of "Generation Debt: Why Now is a Terrible Time to be Young," wrote in a Christian Science Monitor op-ed article. That figure includes 55 percent of African Americans and 58 percent of Hispanics.
As Pamela Burdman points out in an article on page 11, many low-income students, especially among minorities, immigrants and first-generation students, are unwilling to take on such large debt burdens and consequently do not seek education beyond high school.
"The loan programs were originally intended to increase college participation by lower-income groups but have ended up benefiting the middle class," said Becky Timmons, of the American Council on Education.
"The original idea was that (federal) grants would pay for access, and loans would provide choice," said Brett Lief, of the National Council of Higher Education Loan Programs. "But 30 years later, loans are being used for both access and choice, and that's not good. What we need is a more substantial grants program."
A few well-endowed elite colleges and universities recently have announced that they will pay tuition, room and board for students from families with incomes below $50,000. However, such programs will assist only a tiny fraction of the student population.
The Pell grant, for low-income students, has remained at $4,050 for five years. That is enough to pay tuition and mandatory fees at most two-year community colleges but is insufficient to finance an education at even the least expensive four-year institutions. During the 2004 election campaign, George Bush praised Pell grants and said he would increase them to $4,500, but his budget did not include the money to do so.
"At a time when more students are eligible and needy, administration officials could have used the surplus to increase the Pell grant maximum," said Cynthia A. Littlefield, director of federal relations at the Association of Jesuit Colleges and Universities. "But they chose not to."
More than 20 percent of student borrowers drop out, Lawrence Gladieux and Laura Perna found in a study published last May by the National Center for Public Policy and Higher Education (which also publishes National CrossTalk).
Of all the students who began postsecondary education in the 1995-96 academic year, 23 percent were no longer enrolled in 2001.
"That is, more than 350,000 beginning freshmen were left with no certificate or degree, and a debt to repay," Gladieux and Perna wrote.
All of this makes little sense to those who worry about America's ability to compete in a global economy.
Nationally syndicated columnist Neal Peirce recently noted that one day after Bush, in his January State of the Union address, called for a $5.9 billion American Competitiveness Initiative, to strengthen the country's math, science and engineering capabilities, the House of Representatives voted to make the biggest cut ever in the student loan programs.
With tuitions rising and students forced to assume staggering debt burdens to pay for college, "What's the real hope for a scientifically advanced America?" Peirce asked.
Many in the higher education community were disheartened by the decision to seek budget savings by cutting the student loan programs and by the lack of substantive debate in Congress.
"The basic issues, the issues that should have been raised, were just glossed over," Gladieux said. "How much debt is too much? What should be done about students who really shouldn't be borrowing at all or are borrowing way too much? There is a lot of money to be made off these programs, so there isn't much incentive for change."
