Shayna Murphy was completing
summer studies in England
when a friend e-mailed her the
news: The Massachusetts Educational
Financing Authority had just announced
that it didn’t have the money to make private,
or “alternative,” student loans—the
kind that students turn to after tapping out
on federal ones. This was MEFA dropping
the second shoe, the first one being its exit
from the federal loan market in the spring.
Suddenly, the agency was effectively out of
the business for which it was created.
And 25,000 would-be borrowers—mostly Massachusetts residents or students attending school there—were left with just a couple of weeks to scramble for new private lenders before their fall semester
bills came due. Those stranded included about 2,200 students—about one in ten undergraduates—at the University of Massachusetts Amherst.
Murphy, a junior there, was expecting
to apply to MEFA for a private loan of
$1,800 to $2,000 when she returned and,
based on previous experience, get her
money in time to pay for fall classes. “It
took a while for it to set in for me that this
was going to be a big problem,” she said.
While friends easily made new
arrangements, the three lenders Murphy
applied to turned her down for her lack of
a cosigner and credit record. To make camends
meet, she doubled up
on work, adding a job in a
campus kitchen to her
existing work-study assignment.
Putting in 30 hours a
week while taking a full
load of classes “makes it
difficult,” she said, “but I
should be able to pull it
together.”
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Shayna Murphy, a junior at the University of
Massachusetts Amherst, had to double her work schedule
after an expected student loan failed to come through.
(Photo by MJ Maloney, Black Star, for CrossTalk)
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Murphy and the Massachusetts
students were
caught up in a particular,
and spreading, credit crisis
that began well before the
current global one became
a topic of everyday conversation.
Beginning in late
2007, student lenders started
playing hard-to-get. By spring 2008,
almost every day seemed to bring word of
yet another student-loan source scaling
back, deciding either to serve fewer
schools, or make fewer loans or none at
all. The list of the totally or partially disabled swelled to include every type of
provider—banks, student-loan companies
and non-profit state student-lending agencies.
The agencies of several other states found themselves in the same cash-short
bind as MEFA, which got back into private
lending in September 2008, after securing
$400 million in new bond financing. Its
counterparts in Kentucky, New Mexico,
Illinois and North Carolina managed to
provide uninterrupted service by also issuing
bonds. Unable to get any financing,
those in Pennsylvania, Texas and Michigan
suspended lending altogether.
As academic 2008-09 began, 130
lenders, including 27 of the industry’s 100
biggest-volume originators, had folded
their federal-loan businesses. In addition,
31 providers had quit offering private
loans. (These counts come from Mark
Kantrowitz, who tracks the student-loan
industry on his website, finaid.org.)
Disruptions continued into the fall
semester, which found thousands of students
waiting weeks for promised loans, or
scouring for back-up lenders after their
old reliables left them hanging.
In mid-August, Edamerica—a forprofit
which counts itself the country’s
eighth-largest provider of federal student
loans, and the fastest growing of the top
ten—notified 200,000 students across the
country that it would not be able to pay
them right away.
Among those coming up empty handed
were 1,500 students at 21,000-student
Kennesaw State University in Kennesaw,
Georgia. Joe Head, assistant vice president
and dean of enrollment services, said
the news came just four days before students’
deadline to pay up for the fall
semester. About 500 were able to do so
anyway, he said. To those who couldn’t,
the university offered vouchers for the
bookstore, explanatory letters for their
creditors, and assurance that their classes
wouldn’t be canceled.
For the university, Head said, the delay
was “a drag on timely and accurate information”
on enrollments, as well as a frustration
and inconvenience to many campus
offices, not just student accounts.
It took a month for Edamerica to
come through for all of its Kennesaw State
borrowers. By then, Edamerica chairman
and chief executive Tony Hollin said, the
company had worked through virtually all
of the $280 million loan backlog with
which it began the school year and had
caught up with other students and colleges
across the country. For the delay, Hollin
mostly faults slow disbursements from the
U.S. Department of Education, and a 70
percent increase in his company’s loan volume,
the result of other lenders quitting
the business.
Kennesaw State senior Courtney
Ayres watched the situation unfold there
from inside the university’s financial aid
office, where she works part-time. The
staff was inundated with concerned students,
some crying, some “rude and
obnoxious,” she said. She was upset herself, at first, but then “kind of calmed
down” at the prospect of having to wait
for the $1,980 loan she needed for health
insurance and room and board after she
covered her tuition with her federal Pell
grant.
Ayres counts herself fortunate to have
had enough money on hand the keep herself
in groceries during the couple of
weeks she had to wait for her loan.
Despite the hitch, she expects to continue
borrowing from Edamerica, which has
otherwise served her well, rather than take
her chances with a new lender. “All
lenders are going to have their issues,” she
said. “I’ve seen a lot of lenders go through
a lot of problems.”
Their problems largely trace to those
risky sub-prime mortgages and the fancy
securities they were bundled into, all of
which began souring in mid-2007 and went
on to spook the entire global economy. As
the crisis deepened, credit markets seized
up, and student lenders were among borrowers
of all sorts who found their usual
money wells shallow or, at worst, dry.
Lenders in the federal loan market
took a second whammy from the federal
College Cost Reduction and Access Act,
which was passed partly in reaction to revelations
of shady practices by a few student
lenders and went into effect in
October 2007. While dropping to six percent
from 6.8 percent the maximum interest
rate students could be charged on the
cheapest federal loans made after July 1,
2008, the measure lowered the subsidies
and raised the fees for the lenders. Lower
profits, plus scarcer and costlier funds,
made for a powerful disincentive for
lenders to continue business as usual, or to
continue at all.
The result was the most chaotic year
for student loans since the federal government
got into the business of guaranteeing
them for collegians and their parents in
1965. Since then, debt has increasingly
become the means to a degree. An estimated
two-thirds of undergraduates now
borrow somewhere, somehow, to finance
their educations. They have no choice, as
family incomes and money available as
grants or scholarships that don’t require
repayment have failed to grow in synch
with the escalating cost of college attendance.
Last year, students borrowed nearly
$66.7 billion in the federal governmentbacked
loans alone, an inflation-adjusted
increase of 70 percent in a decade, according
to the College Board.
However, the federal government lets
students borrow only up to certain prescribed
limits. From time to time it raises
them, but recent increases have lagged
behind rising college costs, forcing more
students into more private loans to cover
their widening budget gaps. Students took
out $19.1 billion in private loans last year,
up from $1.3 billion in 1997, when the
College Board’s annual report on college
financial aid first took note of that emerging
market.
Sometimes dubbed the “wild west” of
student lending, the private market is a
catch-as-catch-can place where borrowers
are on their own to find lenders and negotiate
terms. While federal loans are fixedrate,
private loans are generally of the
variable type, their rates fluctuating over
time and depending on market conditions
and borrowers’ credit-worthiness.
As Shayna Murphy discovered to her
chagrin, qualifying for a private loan these
days can be problematic, as straitened
lenders, even those who never made subprime
mortgage loans, have hunkered
down into defensive mode and raised the
bar for borrowers.
Parents Susan Jones Knape and
Patricia Bromfield, though eventually successful
in securing private college loans for
their children this year, also attest to private
lenders’ newfound caution.
For Knape, a Dallas marketing executive,
the entire process of applying for
financial aid for two freshman daughters
(Jordan and August) at the same time
was so “mind-boggling” she had to “stop
a couple of times and have a margarita.”
Finally, with federal loans in place for
Jordan at Pratt Institute in New York and
for August at Southern Methodist University,
she applied for private loans for
both girls. The bank she found required
her co-signature on a nine percent note
for August and a 12 percent one for
Jordan. With regard to the three-point
difference, the only explanation Knape
can imagine is a ding on Jordan’s credit
report because she had once reneged on a
contract with a gym.
Patricia Bromfield, an information
technology specialist in Joliet, Illinois, has
had two years of even more puzzling experiences
with private loans. Her daughter,
Nicole Worthem, now a sophomore at
Benedictine University in Lisle, Illinois,
got one on just her own signature for the
first semester of her freshman year.
Second semester, the same lender
required a cosigner and accepted
Bromfield. The rate both times was an
“astounding” 14.25 percent, Bromfield
said, but the lender was easy to work with.
Not so for Nicole’s second year, when
the same lender demanded two cosigners.
At that, mother and daughter—separately,
together and with other possible cosigners—
began applying to “everybody and
anybody” for a private loan. Ultimately,
the originator of Nicole’s federal loans
came through with a private one at 10.25
percent, with Nicole’s boyfriend serving as
cosigner.
Bromfield is mystified about why this
year’s rate is lower than last year’s, and
why the lender allowed the boyfriend,
who has no credit history, to cosign. She
dreads next year, when Nicole’s twin
brother, Nicholas, now attending community
college on minimal federal loans,
expects to transfer to a four-year school.
She just hopes it won’t be a private one.
“This loan situation is getting to be a nightmare,” she said.
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Courtney Ayres, a senior at Kennesaw State University, in Georgia, was one of the
200,000 students whose student loans for the 2008-09 academic year were delayed
by Edamerica, a major student loan provider.
(Photo by Robin Nelson, Black Star, for CrossTalk)
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To James A. Boyle, president of the
95,000-member College Parents of
America, the loan situation is, at root, a
college-pricing problem. “Colleges are
raising their price because they can,
because there’s a large cohort of students
coming through high school,” he said.
“Couple that with the fact that there are
more families that recognize that a college
education is important to success…There’s
a strong demand for seats in college, and
there’s a fixed supply, and that causes the
price to go up.”
Boyle’s prescription is for colleges to
rethink their financial aid policies and limit
the merit aid many use to attract better
students, a practice that only raises the
sticker price for all, he said. “There needs
to be greater emphasis on need-based
financial aid.”
Meanwhile, quicker, smaller fixes for
lenders and borrowers are already in
place, the results of the Ensuring Continued
Access to Student Loans Act of
2008. To lenders, the law extended a helping
hand in the form of a promise that the
federal government would buy from them
all federal student loans they could not
otherwise sell to raise capital. Originally
due to expire in mid- 2009, the offer has
since been extended for an extra year.
The pledge is widely credited for keeping
a worrisome situation from worsening,
by keeping federal student-loan money
flowing, even if haltingly and through fewer
lenders. “It helped avert a crisis by providing liquidity to the education lenders,”
Mark Kantrowitz said.
Borrowers received two immediate
and permanent favors from the same act,
both portending to make them less dependent
on expensive private loans: The act
raised the borrowing limits on federal student
loans by $2,000, and it improved the
terms on federal parent loans.
Now, for the first time, parent borrowers
can postpone repayment on their loans
as long as students remain in school, just
as they have long been able to do with private
loans. Parent loans already had the
additional advantage of coming with a
fixed rate, now 8.5 percent.
Although that might be higher than
some initial rates on variable-rate private
loans, parent loans are now the better
long-term option, according to Beth A.
Post, financial aid director at the State
University of New York at Albany. So this
year the university is showing parent loans
as pieces of students’ aid packages and
advising applicants about them.
Sandy Baum, a professor of economics
at Skidmore College, and a senior policy
analyst specializing in college aid for the
College Board, welcomes the new parentloan
provision. “There has always been a
big question of why it is that parents who
would be eligible for parent loans are having
their students go instead to the private
loan market, where rates are higher,” she
said.
“In some cases it’s because parents feel
it’s the student’s responsibility to pay for
their college education,” and they hesitate
to take on debt of their own, said Carolyn
LeGeyt, senior associate director of financial
aid at Trinity College in Hartford,
Connecticut.
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Financial aid adviser Maria Gadberry counsels one of the 1,500 Kennesaw State
University students whose Edamerica loans were delayed this fall.
(Photo by Robin Nelson, Black Star, for CrossTalk)
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Susan Knape didn’t hesitate, but in
applying for a parent loan, she ran up
against their chief disadvantage: In contrast
to federal student loans, approval
isn’t automatic. Rather, just like private
student loans, federal parent loans require
a credit check, and in today’s harsh credit
environment lenders have grown more
picky about granting them. Given her
good job and what she thought was flawless
credit, Knape expected to qualify. So
she was “flipped out” when she was rejected.
Investigating, she found that a former
creditor had reported a dispute they had
had to a credit agency but neglected to
note that a settlement had been negotiated.
After that one disappointing try, she
gave up on private loans altogether.
While the student-loan crunch played
on with no end in sight, the 2008 presidential
campaign played itself to a close without
education issues catching more than
the glancing attention of the parties and
candidates. Of the two major parties’ platforms,
only the Republicans’ specifically
mentioned student loans, urging simplification
of the current “Byzantine” system,
but offering no specific suggestions.
On the campaign trail, John McCain
vaguely pledged to fight to make student
loans more affordable. Barack Obama
came out for a gradual switch to “direct
lending” of federal loans and elimination
of the prevailing system, by which student
loan companies, banks and state agencies
make these loans, and the government
guarantees them.
In doing so, he was endorsing an idea
that originated in the administration of
George H.W. Bush—that it would be
cheaper, faster and simpler for students to
draw their federal loan money directly
from the federal government rather than
through financial middlemen. After President
Bill Clinton enthusiastically took up
the cause, direct lending began in 1994 in a
small way, with about 200 colleges and universities
taking part, and accounting for
just four percent of federal student loan
dollars.
Three years later, hundreds more
schools had signed up, and one-third of
federal loan volume was flowing through
the direct program. Then, over the next
decade, direct volume dwindled, little by
little, to 19 percent of the total.
The growth stalled chiefly because of
opposition, and then competition, from
the banking industry, which managed,
even as direct lending began, to persuade
Congress to put limits on it. The argument
against it was a classic free-market, antigovernment
one—that students would be
best served by a marketplace where multiple
providers contended for their business.
That indeed proved to be the case,
according to many financial aid officials at
schools that use the traditional federalloan
system, some after trying direct lending
and finding it wanting. Students have
benefited, they say, as lenders vied with
one another to offer the best rates, repayment
options and service. Plus, Jane M.
Hojan-Clark, director of financial aid at
the University of Wisconsin-Milwaukee,
said many families appreciate the option
of picking their lenders, perhaps ones with
whom they already have a comfortable
relationship.
In the past year, though, tight money
and margins have left federal lenders little
room to cut deals, and their service has
turned spotty. Meanwhile, “the Department
of Education has proved more reliable
than the banking community” in
delivering federal loans, said Martha
Harbaugh, financial aid director at Maryville
University in St. Louis. For 12 years,
she added, direct lending has worked so
smoothly there that students aren’t even
aware of it.
David Wiggins, a senior history major
at the university was aware only that his
federal loan money had always come
through without a hitch, but he had “no
clue why.” After direct lending was briefly
described to him as a possible reason, he
grinned. “That’s awesome!”
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After a “mind-boggling” experience trying to find student loans for her two
daughters, Dallas marketing executive Susan Jones Knape finally secured a private
loan at 12 percent interest for daughter Jordan (above) to attend Pratt Institute in
New York, and a nine percent loan for daughter August at Southern Methodist
University.
(Photo by Lisa Quiñones, Black Star, for CrossTalk)
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The U.S. Department of Education
had counted, through mid-September, 400
schools switching to the direct program in
2008. They include returnees Michigan
State University and Indiana University
Bloomington, and newcomer Pennsylvania
State University. Recruits also
include a number of community colleges
and small private colleges cut off by
lenders because their loan volume was too
low, said Roberta Johnson, director of student
financial aid at Iowa State University
and chair of the National Direct Student
Loan Coalition, whose member schools
use and advocate the direct approach.
More schools are considering it. Given
its experience with Edamerica, Kennesaw
State University will probably look into
direct lending, according to Joe Head. A
committee at SUNY Albany is studying a
switch, having been through “a processing
nightmare” with lenders this year, Beth A.
Post said. “I can’t imagine a student keeping
track of what they’re supposed to
understand and what they’re supposed to
do.”
Will Shafner, director of business development
for the Missouri Higher Education
Loan Authority, cautions that direct lending
is not as glitch- or cost-free as it might
first seem. That’s because the Education
Department hires private vendors to administer
the program. “They’re paying
somebody to answer the phones and
process all of those applications,” he said.
And with “more schools panicking and
signing up,” he predicted that contractors
will not be able to handle the extra volume.
A College Board-sponsored report on
student financial aid, published in September,
takes no sides in the debate over
how best to deliver federal student loans.
Though largely a plea for streamlining
delivery of federal grants, the document
argues briefly for lifting federal loan limits
as a way of reducing students’ “excessive
reliance on alternative loans with less
favorable terms and without the borrower
protections provided by the federal government.”
The National Association of Student
Financial Aid Administrators also has
“concerns” about private loans, especially
the “predatory” marketing practices of
some lenders, said president and chief executive
Philip Day. As remedies, NASFAA
supports raising federal loan limits and
increasing federal Pell grants in order to
“minimize student debt.”
For harried borrowers, the immediate
prospect is for more of the same.
Although federal-loan money is abundant
and readily available, the financial gobetweens
that arrange the loans are not,
meaning borrowers may have to work
harder and longer to get the money they
need.
For the higher-cost private loans, the
search could be even more difficult and, at
worst, futile. That’s because these loans
are in the same leaky boat as consumer
loans in general, subject to prevailing credit
conditions. Mark Kantrowitz foresees
slim pickings “unless the capital markets
recover.” What’s more, interest rates are
rising on the private loans still out there.
As a new student-loan cycle for another
school year begins amid continuing
uncertainties, Day offers this practical
advice for loan-seeking students and parents:
“Don’t wait till the last minute to line
up your financial resources. Get in and
talk to the financial aid professionals…and
let them work with you,” he said. “The
sooner people do that the better off they
are.”
