I Can say with 100 percent certainty that every eligible student who wants a federal
student loan will be able to get one. It is true that a number of loan companies have
gone out of business, and as someone who has been laid off in an economic downturn, I
feel for those companies’ employees and for their families. But the fate of those companies
does not portend the future of federal student loans generally. In fact, there has not been
one case of a student or parent who can’t get the federal loan that they are eligible for. And
there will not be even one case. Perhaps this seems an audacious claim in the current economic
climate. But I am not really going very far out on a limb.
It is no accident that federal student loans are the only consumer loans that have not suffered
a serious retrenchment in this credit crisis. That is because they are not actually “consumer
loans.” When a bank makes a federal student loan, the bank is not making the loan
based on the expectation that the student—the consumer—will be able to repay the loan.
The bank is paying attention to the cosigner on the loan: the U.S. government. As taxpayers,
we are the ones who are borrowing the money,
with the hope that we won’t actually have to pay
the loan back, because the students will prosper
and be will able to repay it.
Some student loan companies shut their doors,
and some banks cut back on their lending because
many had come to rely on the same financing
mechanisms (asset-backed securities) that were
being used for mortgages. When problems with
subprime mortgages begin to undermine confidence
in those markets, securities backed by student
loans fell along with all of the other dominoes. For mortgages and other true consumer
loans, the credit freeze has been difficult to thaw. Taxpayers can’t just make good on all
those mortgages, because doing so would reward lenders who had made bad decisions
about whom to lend to and how much the properties were really worth.
But the federal student loan program is different. Lenders don’t make any of those
underwriting decisions. The federal government—in partnership with states, accrediting
agencies, and financial aid administrators at colleges—determines which students should get
loans, how much they should get, whether the schools are worth it, and what the interest
rate and other loan terms should be. As Sallie Mae’s CEO explained in July, “There’s a master
promissory note, servicing standards, and [subsidy levels], all determined by the
Department of Education. We don’t control anything.”
That’s why it was not a monumental shift for the federal government to decide, last May,
to give lenders direct access to cash for making federal student loans. Congress and the
Department of Education took a system that was already wholly financed by the full faith
and credit of the U.S. government, and turned it into a system that is still wholly financed by
the full faith and credit of the U.S. government. In 1993 Congress had made a similar shift—
inconsequential from a balance sheet perspective—by allowing schools to bypass the banks
and make the federal loans directly to students.
Whichever way the funds are delivered to students, the money comes from investors
who trust the federal government’s ultimate ability to repay. Indeed, during this economic
downturn investors have been rushing to Treasury bills as one of the only places they feel
safe putting their money. The federal government is borrowing those investors’ funds and
funneling them to the student loan companies to make the same loans in the same amounts
to the same students at the same schools with the same risk to taxpayers as before the credit
(The astute reader will notice one flaw in my confident assertion about unfettered access
to federal student loans: What if the federal government is unable to borrow money? If our
nation reached that point, it would mean that we are so close to a calamitous collapse of our
political and economic system that no one would bother to remind me of my audacity
regarding a little student loan program).
There are reasons to be worried, though.
While access to federal student loans is as secure as it can possibly be, nearly everything
else about this economy is bad news for students and families trying to piece together the
money they need for college. Families that had savings in mutual funds, or were counting on
home equity for retirement or for college, now have less. Those who do have money are
understandably reluctant to spend it, because of uncertainty about their own financial security
in the coming months and years. More families are bracing for the possibility of losing a
job, or failing to get an expected promotion or raise. Students who want to work to help pay
for college costs are facing a tighter job market, with wages that have not kept pace.
That’s not all. Colleges that rely on donations
to help finance scholarships and other programs
are finding that donors—hit by declines in the
stock market—do not have the same deep pockets
they had in recent years. The colleges that have
endowments will not see the returns they had
hoped for, unless there is a dramatic reversal in the
economy. Stagnant wages, frozen credit, and
declining fortunes all mean that consumer spending
is down, too, contributing to less economic
activity overall. That means that states—which,
unlike the federal government, have to balance
their budgets—will have less revenue to fund state
universities and state scholarship programs. State
budget cuts will almost certainly lead to increases in tuition, cutbacks in course offerings,
and/or reduced financial aid.
The federal Pell grant, too, could fall victim to the crisis. Congress a year ago promised
much needed increases in the size of the grant and took steps to finance the boost.
However, now that more people are applying for financial aid, and more of them qualify for
a grant, the cost of the program is far exceeding the pre-recession projections.
Congress’s number-one priority for higher education should be to fill these holes in the
college financing system. Doing so represents an urgent investment in improving skills and
bolstering our economic productivity as a result. Accelerating increases in the Pell grant
program will help to cushion students against the tuition increases they are going to face.
The federal government should also provide funds to states aimed at maintaining the enrollment
capacity of public college and university systems, and encouraging need-based grant
aid. More than in good economic times, Americans need the option of an affordable and
high-quality college education.
This brings me back to loans, because even if grant aid is increased, there will still be a
rise in the demand for loans. To a large degree, the federal loan program will accommodate
that additional demand without any further action by Congress. Parents who had previously
relied on private student loans or on home equity lines of credit are discovering that they can
tap federal PLUS loans, up to the total cost of tuition, books and student living expenses.
Congress already boosted the amount that undergraduate students can borrow, and cut
loan costs. And most graduate students have access to loans up to full cost. (For more
detailed information, please visit projectonstudentdebt.org). While there are borrowing limits
for students, there is no cap on the total amount that the federal government can make
available in loans, so even if more students than anticipated make use of the program, they
will all get the loans they are eligible for.
The system as designed does not accommodate every circumstance, however. As in the
past, there will be sympathetic stories of students facing financing gaps. These will tend to
involve traditional-age college students at private colleges, with parents who are unable to
help with tuition as much as they might have hoped. While these dependent students—
those who are under 24, not married or a parent and not veterans—can now borrow
$31,000 in federal loans for their undergraduate education, that may not be enough.
These stories, which are likely to appear more frequently than in the past, due to the
state of the economy, will fuel a drive for large general increases in loan limits, or even lifting
the limits altogether to allow students to borrow
up to the full cost of college. That would be an
imprudent, counterproductive and damaging step
for the federal government to take. Some colleges
would take advantage of the unlimited federal
entitlement by cutting aid and sending tuition
charges into the stratosphere.
Young adults’ optimism about their coming
prosperity is the engine that fuels American ingenuity.
But it also leaves many of them vulnerable,
eager to do whatever it takes, whatever the college
recruiter suggests. Federal loan limits serve as a
stopping point, helping to ensure that these students
take some time to seek out guidance and financial help from family and from counselors,
and that they think twice about attending a “dream” college or trade school that may
turn out to be a nightmare to pay for. Too much credit too easily: Without a hole in the budget
that needs to be filled there is less reason to economize, to seek that scholarship, or to
ask dad or grandma to pay a share. Much more of the costs would end up on the student’s
shoulders, long after college.
I suggest a different solution to help the dependent students who genuinely need additional
loans. College financial aid officials should have access to a substantial, but not unlimited,
pot of additional loan funds to allocate to students who face exceptional circumstances
as determined by the college. The additional loan funds should be available to colleges that,
overall, do a good job of preventing students from having to take out a lot of loans. This
approach respects the professional role that financial aid officials play in assessing students’
needs and family situations. It provides them with a tool they can use for those cases, while
preventing schools from broadly taking advantage of students and of the federal government.
In the midst of this economic disarray, it would have been reasonable to expect that the
student loan system would be in shambles. That is why editors keep assigning reporters to
write stories about people who can’t get loans. But the real problem is not a lack of access to
student loans. It is much bigger than that. The challenge is to make sure there is an affordable
place in college for students from all backgrounds, in the face of growing financial need,
increased demand for higher education, and underfunding at the state and federal levels.
Robert Shireman is executive director of The Institute for College Access and Success: